2022 has come to a close and it has been a tough year for investors.  For example, by some measures (https://www.morningstar.com/articles/1129526/where-to-invest-in-bonds-in-2023), bonds (including investment-grade core bond funds) have never performed this poorly – down approximately 13% for the year.  Compound this with a stock market that is contemporaneously off by over 19% and the unease of paper losses becomes palpable.  Rationally, investors must expect to lose occasionally on the risks we take.  Without intent to diminish such losses, this does not (and should not) alter your investing plan of employing broadly diversified low-cost index funds, that generally own the entire US and International stock and bond markets.  Arguably, the exception (i.e., 2022), proves the general rule (i.e., that diversification works).

For those of us in retirement, this is “why” we created our “cash reserve bucket.”  This cash reserve bucket is to be your source of funds needed to maintain your standard of living during these down market times.  For those of us not quite yet in retirement, this is “why” we created an “emergency fund bucket,” typically ranging from 6-15 months of household expenses.  We hope that this emergency fund bucket is never needed, but its existence provides a reassuring and calming safety net for our households during this potential (pre)recessionary time period.

There is one (dimly lit) bright spot in the investing world though: Value stocks have outperformed Growth stocks by about 30%.  Unfortunately, this means Value has been relatively flat in 2022 to Growth’s 30% loss.  Nevertheless, this is why many of us have discussed the importance of maintaining a relatively balanced allocation between Value and Growth.  On another front, Crypto (notably) failed to distinguish itself from its intrinsically valued counterparts (stocks) by not acting as a diversifier during this market cycle.  Its speculative nature appears attached to the money supply (at present), at least until backed by first-world economies.

So, where do we go from here?  Most economists are forecasting a shallow to moderate recession (with the FED still hoping for a possible “soft landing”).  If inflation remains elevated (e.g., due to wage pressures), a “soft landing” will be hard to orchestrate – after all, the FED’s Federal Funds Rate tool is more of a cudgel than a scalpel.  Accordingly, you will still want to maximize your cash rate of return.  By way of example, some FDIC-insured online banks are offering around 4% for a savings account, while some FDIC-insured brokered CD’s are yielding over 4%.  Please remember that brokered CDs can fluctuate in value, i.e., they can lose or gain value if sold prior to maturity.  Finally, don’t forget to rebalance so you can capture some of the next market cycles.

If you have questions about your retirement plan or your investment portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.