This time last year I wrote, “Markets are unpredictable. Sometimes the surprises are good ones. But we’ve had a lot of those the last few years, so be prepared for some inevitable bad surprises ahead.” Well, here we are.
It’s been a sobering year for investors and early retirees. I had my head down on a big writing project (more below) for months and didn’t pay much attention to the markets until I ran the numbers a week ago. The resulting picture is not pretty.
My conservative and diversified retirement portfolio lost 17.7% for the year. It was the second-worst performance in almost twenty years of tracking my investments. Only 2008 was worse, with a 26.2% loss.
All of my holdings were down, most of them in the double digits, except for cash, which barely returned enough for a trip to Starbucks. Gold got an honorable mention for “only” losing about 1%.
If you’re a seasoned investor, you know not to construct a retirement strategy based on above-average returns. We were very fortunate to see such a scenario unfold in four out of the past five years. But now it has ended. For how long, none of us know.
As a retiree living off assets, caution is always advised. I’ve been in a defensive posture for most of my investing life, holding a roughly equal stock and bond asset allocation. The idea is that relatively stable bonds give you a cushion against stock fluctuations. But this year bonds suffered almost as much as stocks.
Like many, I enjoyed watching the run-ups in the stock market, bond prices, real estate, and digital currencies. It’s tempting to think of those gains as real and permanent. This year taught us that it isn’t necessarily so.
Read on for my annual portfolio performance report….
My investment philosophy has not changed, nor have my holdings. Big picture, I still hold a small number of low-cost index funds in a familiar asset allocation:
|Fund||Symbol(s)||Expense Ratio||% of Portfolio||2022 Return|
|Vanguard Wellesley Income||VWIAX||0.16%||41.2%||-9.01%|
|Vanguard FTSE Social Index Fund||VFTAX||0.14%||10.3%||-24.22%|
|Schwab International Equity ETF||SCHF||0.06%||10.7%||-14.9%|
|Schwab Intermediate-Term U.S. Treasury ETF||SCHR||0.03%||10.7%||-10.63%|
|Schwab U.S. TIPS ETF||SCHP||0.04%||8.4%||-11.96%|
|Vanguard LifeStrategy Moderate Growth||VSMGX||0.13%||6.5%||-16.00%|
|SPDR Gold Shares||GLD||0.40%||4.7%||-0.82%|
(Note: Portfolio percentages are as of 12/30/2022. Overall return is not necessarily a weighted average of individual returns, because holdings can change slightly during the year.)
Overall, my portfolio is currently allocated about 41% in stocks, 46% in bonds, 7% in gold and digital currencies, and 6% in cash, taking into account the actual reported cash holdings in all of my funds. (The cash return stated in the table above is approximate. I don’t have a simple way to average my different cash holdings.)
Of the stocks, 34% is international. (Taking into account the actual reported international holdings in all of my funds, not just in those funds labeled “International.”) I’m OK with a significant allocation to international as a diversification away from potential long-term economic woes in the U.S. related to debt.
Purchases and Sales
My investment activity these days is driven by our retirement income needs.
The positions I sold to cover our retirement living expenses — mostly in the first half of the year — were all from my stock funds. My sense at the time was that stocks were more richly valued than bonds.
Those sales, coming mostly from a traditional retirement account, are taxable. So I keep an eye on the realized income and the proximate tax brackets, especially toward the end of the year. So far, I’ve been successful at keeping us in the 12% marginal tax bracket.
I didn’t buy any securities during the year.
In my experience, needs and markets fluctuate year to year and I’d rather respond to those conditions than blindly follow a mechanical strategy. Though studying systematic retirement withdrawal strategies is useful as an academic exercise, to understand how your money will last under different conditions.
When I sell holdings to fund our living expenses, I keep an eye on PE ratios, and tend to sell stock instead of bond funds when those ratios are high, as they have been for most of our retirement.
This year that strategy might have been questionable, because the stock funds I sold ended the year lower than my bond funds. In other words, I might have been selling my most damaged assets. However, as noted above, I did most of my selling in the spring, before the market’s recent lows.
In the long run, I’m aiming to consolidate all our investments in one or two Vanguard balanced funds. Liquidating those will then be a simple, one-dimensional decision that takes the stock vs. bond variable off my plate. That’s probably a good thing.
Some day an immediate or charitable annuity may be useful to simplify our financial life further. For the first time since I’ve been following them, annuity payout rates are looking substantially better than safe withdrawal rates, on paper. For example, ImmediateAnnuities.com just quoted me a 6.8% payout rate for a joint lifetime annuity.
Just remember that payout rates and safe withdrawal rates are not directly comparable: with an annuity, you turn your money over to the insurance company. There is no potential to reclaim or grow principal.
And there is another significant catch. Those payouts aren’t inflation-adjusted. With inflation running at a several-decade high, am I willing to gamble that an annuity purchased now will hold its purchasing power over the 20-30 years likely remaining in our lives? So far, I haven’t wanted to make that bet. In my experience, the stock market provides more reliable growth and inflation protection over long periods.
But I’m getting closer to hedging my bets with an annuity purchase.
Inflation and Expenses
Annualized inflation this past year ran as high as 9.1% in June, coming down to 7.1% in November. Those are rates of inflation that we haven’t seen since I was sneaking off for camping weekends and cramming for tests in college.
I’ve always argued that you should keep tabs on your personal rate of inflation, which could be more or less than the “official rates.” So, I checked our food costs — grocery plus dining out expenses — for 2022 versus 2021. They grew by 12%. I suspect that some of that increase is lifestyle creep, but it likely shows that the prices we’re paying have spiked as well.
Is this a short bout of inflation or a sea change? Opinions abound and mine is worth no more than the others. Bottom line, I have no idea.
Recently, it appears that inflation may be cooling a bit. However, philosophically speaking, I expect inflation and shortages to be part of our life going forward. The world is more crowded than ever, with more and more wealth competing for limited resources. That seems like a recipe for rising prices to me. And long-lasting inflation has the potential to reduce or eliminate real market returns.
Are my investment strategies going to change in the face of a more inflationary world? Unfortunately not. I have no secret weapon against inflation. I’ve been concerned about the problem for decades and already built it into my investing approach. The simplest strategy I know to combat inflation is to own resistant assets such as stocks, TIPS (Treasury Inflation-Protected Securities), real estate, and commodities.
Related: I Bonds vs. TIPS — Which is Better?
In that last category I’ll note that gold (I own the GLD ETF) was a “star” performer last year. If you can call losing less than 1% a star performance. I’ve owned gold as a small portion of my portfolio for many decades now and not regretted it.
Bottom line, this year was the largest decline in our net worth that I’ve ever seen. Though it’s important not to overreact, since the year started from a high point in bubble-like conditions. Nevertheless, I intend to play it safe. We’ll be making significant cuts in our discretionary expenses. Better to take some unpleasant medicine now, than face serious consequences later.
Renting vs. Buying
Some readers may remember that we purchased a home two years ago, after renting for many years. How has that impacted our finances?
Now that our expenses have settled down and I have some data to study, I can make an interesting observation. The cost of owning, for us, has been almost identical to the cost of renting. That’s because our increased expenses for home insurance, utilities, real estate taxes, and income taxes have been almost identical to what we had been paying in rent.
There is a key caveat here to understand: We had an exceptionally good rental deal, with low rent payments for many years that also included many of our utilities. Also, note that because buying our house required moving most of our after-tax savings into home equity, our income tax bill has spiked as we now must make retirement account withdrawals for living expenses. Without those two somewhat unique and personal factors, home ownership would have been an even better deal for us in our location. I’ll also note that real estate in our area far outperformed the stock market last year.
As I’ve often written, non-financial factors often override financial ones in the rent versus buy decision. We rented in the early years of our retirement because we didn’t want to be tied down. Now we own a home because we want that control over our lives.
As mentioned, gold has had a long-term role in my investment portfolio. It’s both grown in value and been an effective diversifier for me. There are good arguments both for and against gold. But in my view, you hold it for the bad times. I guess this year proves the point. But I’m not going to argue very hard that gold is a great investment just because it remained essentially flat during a uniformly bad year.
Related: Going for Gold
My tiny digital currency position had a terrible year. Though I’ve already booked more than enough profits to be on the winning side of that bet, no matter what happens to the rest of my crypto holdings.
I was never a crypto “believer.” And I do not think crypto currencies have any role in the average retirement portfolio. But, as a retired software engineer, I felt that the underlying blockchain technology had merit and so I made a small purchase (less than 1% of my portfolio) in late 2016. It was intended as a hedge and a diversifier.
Then I got lucky. Though not as lucky as you might think. It is very difficult to see the dimensions of a bubble when you are inside of one. I sold most of my crypto within the first year or two, missing the majority of the huge runups of recent years. In the end, I got about an 8x return on my money, completely missing the potential for a 60x return. But I’m not complaining.
The crypto space has attracted a horde of speculators and con artists. At this point I’m pessimistic about digital currencies ever playing a useful role in the economy. For example, I’m still not aware of any blockchain applications that actually provide useful value in our daily lives. Crypto looks like pure speculation as far as I can see. And I’ve sold about 90% of my holdings at this point.
My overall investment return for 2022 was -17.7%. That compares to -16.0% for the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) — a possible benchmark for my balanced portfolio that holds about 60% stocks and 40% bonds. My slightly poorer performance is mostly due to the fall in my remaining small digital currency holdings, with some help from my growth and international stocks.
The geometric mean of my returns going back for the 18 years I’ve closely tracked them now is at 6.1%. That’s a respectable average for a conservative portfolio in these times, including the 2008-2009 Great Recession.
And how about you? How did your portfolio fare in 2022?
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NEW BOOK: Beset by chronic pain in early retirement, I must learn how to walk again using crutches in order to realize my boyhood dream of completing a long-distance hiking trail through the towering Rocky Mountains. My memoir about that experience is Rain and Fire In The Sky: Beyond Doubt On The Colorado Trail. It’s a cross between Cheryl Strayed’s Wild and Bill Bryson’s A Walk In The Woods.
If you might be interested in reading a draft of the book, or being notified once it’s published, please add your email address to my list at this link. (Only used for occasional news related to the book. You can unsubscribe any time.) Thanks!
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[The founder of CanIRetireYet.com, Darrow Kirkpatrick relied on a modest lifestyle, high savings rate, and simple passive index investing to retire at age 50 from a career as a civil and software engineer. He has been quoted or published in The Wall Street Journal, MarketWatch, Kiplinger, The Huffington Post, Consumer Reports, and Money Magazine among others. His books include Retiring Sooner: How to Accelerate Your Financial Independence and Can I Retire Yet? How to Make the Biggest Financial Decision of the Rest of Your Life.]
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