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2022 Bear Market Assessment: What We Got Right & Wrong

"The most important quality for an investor is temperament, not intellect." Warren Buffett, CEO Berkshire Hathaway

Every now & again, it's useful to look inward to identify gaps, blind spots, and opportunities for refinement (we did a similar exercise in 2020).

But, you have to be careful. Investing is full of false signals and messy feedback.

For example, you could follow a solid process, invest in an asset class, and have it blow up in your face.

Conversely, you could make an emotional decision, invest in an asset class, and make a bunch of money.

The former investor might feel like an idiot.

The latter investor might feel like a genius.

Neither is likely true.

We look at the rollercoaster of 2022 to examine what we got right & wrong. We include past blog posts to document our thoughts throughout the year...

What We Got Right

1. Underweight Equities

We have been under-allocated to equities for the majority of the year. Our investment process is designed to remove the large drawdown during market sell-offs.

Why Trend Following Could Make Sense for Retirees

2. No large, active bets in technology, or COVID-themed names, SPACs, ARKK funds

Many of the prospective client portfolios we review have performed much worse than the overall indices. An overarching theme has been a huge overweight to technology and COVID economy stocks.

Think Zoom, Netflix, Facebook (Meta), etc.

It's a classic case of performance-chasing and not understanding risk management.

Checking Up on Pandemic Darlings

We still think technology has a place in portfolios, but it would be wise to reset return expectations.

What Goes Up, Must Come Down

3. Short-Maturity Bonds

The U.S. Treasuries curve has flattened out. In our opinion, it doesn't make much sense to own a 20-year bond when you can get a similar yield in a one-year bond.

In this environment, we want flexibility in our bond portfolios. Investing in short-term bonds allows us to take advantage of changes in interest rates and bond yields (bonds mature, we can reinvest at potentially higher yields).


The above graph shows the U.S. Treasury yield curve as of this writing (red, 8/24/22) and one year ago (blue). The red line has become much flatter than the blue, which reflects the Fed's interest rate increases. Notice how similar the yield is for 6-month to 3-year maturities compared to longer-term bonds (20-year+).

4. Overweight Gold

Until recently, gold was one of the few asset classes that was positive in 2022.

We were overweight gold during the first quarter, shifting to neutral, and eventually underweight as the precious metal broke down.

Source: Pure Portfolios, Koyfin

The above graph shows Aberdeen's Physical Gold Shares ETF (SGOL) price action year-to-date. Our over-allocation to gold helped mitigate some equity risk during the first part of the year.

What We Got Wrong

1. Bonds Haven't Held Up

The traditional role of bonds is to offset equity risk in a portfolio. It's not a stretch to say bonds have failed in 2022. It turns out that higher inflation and rising interest rates were bad for most every asset class.

If current conditions hold, this will be the worst year ever for the Bloomberg U.S. Aggregate Bond Index (1977 - 2022).

Source: The Compound, Twitter @charliebilello

The above chart shows calendar year returns for Bloomberg U.S. Aggregate Index (1977 - 2022). 2022 is shaping up to be the worst return year over the past 40 for the popular bond index (and it's not even close).

2. Underestimated Sticky Inflation

Supply chain issues, war, and COVID disruptions caused global supply chain chaos. What caught us off guard was the ravenous appetite of the U.S. consumer.

Much of the outsized inflation was due to the demand side i.e. people buying a bunch of stuff.

How to Solve the Inflation Problem

What Does Peak Inflation Look Like?

3. Trend Following in Bonds

We use trend & momentum rules to help make allocation decisions in equity portfolios. We tried to use a similar approach in a sub-section of fixed income based on empirical evidence and backtesting.

The gist of the strategy is to allocate to high-yield bonds when market conditions are favorable and to U.S. Treasuries when market conditions are unfavorable.

The issue was twofold...

There were disruptions pivoting between high-yield bonds and U.S. Treasuries.

Most asset classes, including bonds, don't hold up well in the face of high inflation and rising interest rates.

We abandoned the strategy in the spring.

It's easy to get discouraged in this environment. This is unlike any market cycle we've ever seen.

From our January 19th post, "Throw Away the Old Playbook"...

It's okay to say "I don't know"

Keep an open mind

Be flexible. Change your mind when the facts change

Avoid stupidity rather than seeking brilliance

Don't anchor to one narrative or identity

The beauty of writing every week is that our thought process is documented for all to see. We aren't perfect, but self-reflection and accountability are attributes of good investing.

Money is highly personal and emotional. Our mission is to help people make better money decisions by optimizing the things they can control.

Is your advisor open, transparent, and accountable? If not, you deserve better. Click here to chat.

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