2022 Was Bad!
2022 was one of the worst years in the last 100 for financial markets:
• It was the worst year ever for the Barclays Aggregate Bond Market Index.
• It was the worst year ever for the 10 year Treasury bond.
• It was the 3rd worst year for a 60/40 portfolio.
• It was the 7th worst year for the S&P 500.
After an awful year like 2022, there are typically two outcomes as to what happens next; you get a bounce-back recovery, or the bad times continue. Luckily, 2023 was the former not the latter.
Overall, 2023 was a good year on almost all measures - thanks in particular to Q4 which saw the US stock market drag the year into a top quartile performance.
2023 Was Great!
The year felt pretty 'meh' for the first nine months, but the US market in particular led a dramatic recovery following improved outlooks for inflation and interest rates.
Investors went into 2023 worried about inflation and expecting a recession by the second half of the year. Instead, inflation has cooled and the economy, in the US at least, has remained solid despite the Fed raising interest rates four times over the year. If you hold a Global Equity Index fund which typically has 60% equity based in the US by proportion to the world market, you have seen many ups and downs in 2023 but finished with a handsome profit.
2023 has been a good year. For most investors, 2023 marked a much-needed comeback when it came to both stocks and bonds after a brutal 2022. If you resisted the temptation to sell assets in Q1-3 and not try to time the market, then you will be going into the New Year with a smile on your face!
Asset Allocation Quilt 2023
The asset allocation quilt ranks the main equity, bond, and commodity sub-asset classes for each year from 2014 to 2023 from the perspective of a UK investor (data courtesy of Monevator and justetf.com). Returns are total returns (ie take into account charges, dividends, or interest earned) but not adjusted for inflation.
This colorful pattern shows that investing success is not as simple as buying last year’s winner; only broad commodities have hung onto the Number One slot for two consecutive years – but in 2023, commodities plunged straight to the bottom of the table.
Last year the FTSE 100 eked out a positive return despite big falls elsewhere, but the UK has underwhelmed in 2023 with a ‘total return’ of 7.7%.
In contrast, the S&P 500 (top 500 companies in the USA) returned 19% in 2023, and Global Equities returned 16%, making these the top 2 funds over the 10 years 2014-2023. The rise of the so-called ‘Magnificent Seven’, behemoths such as Microsoft, Amazon, Apple, and Alphabet - the biggest US technology firms are what drove these returns higher last year.
What is not included in the asset allocation quilt is an index called The NASDAQ 100 which includes 100 of the largest non-financial US companies, making it very tech-heavy. The NASDAQ 100 fell 33% in 2022 but in 2023 it was up 55%, one of its best years ever.
Really, who wants to try and time the market!
A particularly awful year or two can completely alter our perceptions of an asset class and the bond crash of 2022 will poison the well for years to come. Bonds now look like a liability in the light of the last ten years, yet higher yields are almost certain to deliver better returns from bonds over the next decade, provided inflation is tamed.
Vanguard Index Funds 2023
The Vanguard Lifestrategy funds are a way of investing in an index fund with different balances between global equity and global bonds depending on tolerance to risk and volatility.
These Vanguard index funds are accumulator funds i.e. they include dividends or interest which is paid back into the fund rather than being paid out as income. Also, the Lifestrategy funds have a bias towards UK equity, hence the slightly worse performance this year compared to the FTSE Global All Cap fund.
Again it is quite clear to see that timing the market is nigh on impossible with 2023 being almost a mirror image of 2022. Despite most media commentators forecasting a miserable 2023, almost all asset classes have bounced back. Too many investors listened to these 'bad news gurus' and sold at a loss before the Q4 bounce back.
Grad Rags to Riches adage; Buy low cost global index funds and hold for the long term!
How Have Your Funds Performed?
Most people’s core exposure to stocks and bonds is through their company pension scheme, and around 90-95% stick with the employer default fund, whether it suits them or not. The default pension fund is chosen to fit the average staff member but is the equivalent of everyone being given a medium-sized t-shirt - one size will not fit all.
Default funds tend to play safe because employers do not want to get blamed for costly mistakes that endanger their staff's pension savings. Therefore, most default funds tend to be balanced funds with a mix of equity and bonds, and possibly with some other assets thrown in for balance.
If you have more than 10 years to go until you FIRE, is your pension fund getting the best returns for you? Are you 80/20 or 60/40 equity/ bonds when you could be 100 equity?
2024 - Who Knows?
Forget trying to play the market, listening to the experts, and following the so-called trends.
Invest in low-cost diversified global index funds, set up your monthly direct debit into your L/ISA and Pension to enjoy great tax breaks, then switch off your laptop and go and enjoy life. Leave the magic box to do its thing over the long term ie make you WEALTHY!
Investing is a long-term game.
Buy low, sell high.
Be greedy when others are fearful.
Buy and Hold
Time in the market not timing the market