“Past Performance is No Guarantee of Future Results”
We’re flipping a common client disclosure quote on its head as we look at what we may expect from the markets in 2023. Tuesday, 31 January 2023
This common client disclosure is typically meant as a warning that positive results are not always sustainable, but what if we look at it from a different angle? Just because 2022 was a bad year for the markets, it doesn't necessarily mean the same will happen in 2023. So, let’s talk through what we might expect from a typical 60/40 “center of gravity” portfolio this year. This common type of diversification is meant to provide long-term upside growth with downside protection from bonds. What might it produce for investors in 2023? Listen in for my take.
Hi everyone, Jay Pluimer here with Flourish Insights. As the director of investments at Flourish Wealth Management, I take pride in providing our clients, colleagues, and friends with resources and information that can help them make strategic and effective choices regarding their investments. Did you know we have an Alexa Skill? To listen on your Alexa device, just say, “Alexa, play Flourish Insights.”
Today, we are reviewing performance of a diversified portfolio over the past year using the compliance disclosure that “Past Performance is No Guarantee of Future Results”.
The title of this podcast refers to a common compliance disclosure about investment results. Typically the disclosure is a warning that the amazing performance results being quoted in an advertisement or client report are not necessarily sustainable. In this podcast we are flipping that concept on its head with a reminder that just because 2022 performance was bad, it doesn’t necessarily mean the same thing will happen in 2023.
I will be referring to a diversified portfolio with 60% in Stocks and 40% in Bonds or Cash, reflecting a common mix of investments to provide long-term upside growth from Stocks with downside protection from Bonds. Investment legend Peter Bernstein liked to call a 60/40 portfolio “the center of gravity” for long-term investors. That’s because the 60% allocation to stocks would produce returns not much lower than a 100% stock position, while the 40% in Bonds and Cash usually buffered the sharp declines that stocks can deliver in down years.
According to an article in The Wall Street Journal by Jason Zweig, a typical 60/40 portfolio lost about 15% in 2022, which would be the 4th worst year ever for that portfolio approach. The biggest driver of bad market returns in 2022 was rising interest rates, a theme that caused bond investments to have their worst year ever. Although bonds have historically reduced risk and offset stock market losses, we just experienced a bond market that should only happen once every 130 years.
So why are we taking the approach that the historically bad returns for a 60/40 portfolio in 2022 don’t necessarily predict similar returns in 2023? There continue to be questions about additional interest rate hikes by the Federal Reserve along with valid concerns about an economic recession. However, for the first time in recent memory bonds are yielding over 4%. That yield provides a lot of cover for falling bond prices in a rising interest rate environment, along with more confidence that we won’t experience a year with double-digit bond losses like 2022 again regardless of decisions by the Federal Reserve.
The outlook for stocks is uncertain for 2023, with optimistic projections reflecting upside opportunities in the second half of the year. A combination of positive economic growth rates, improving corporate earnings, and low unemployment with rising wages creates a strong foundation for a sustained stock market recovery at some point over the next few years. However, even if stocks continue to struggle in 2023, we should not expect a double whammy from bonds leading to positive return projections. There are still no guarantees that we will have good returns this year, but we can rest assured that past performance from 2022 does not predict or dictate returns this year.
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