Most years, at the end of January, I look forward to receiving my investment tax forms. It’s fun to see how we did and what steps we can take in the coming year to maximize returns and mitigate our tax liability.
This year, unless you walk on water, you probably are not looking forward to seeing the results. The S&P 500 returned -19.64% in 2022 (or -18.32% with dividend reinvestment). The tech-heavy NASDAQ fell almost twice as hard, losing 33.47% in 2022.
In more normal times, investors could have fled to bonds. Not this time. The last time we saw investment-grade corporate bonds take a beating like this, it was the Great Depression. Since record-keeping first began in 1794, there have only been three times in history where bonds have been punished this severely: 1926, 1949 and 2022.
The old 60/40 rule didn’t protect investors one iota in 2022. According to Bank of America, if your investment portfolio or 401k had this distribution, you just had the worst return in a century. Fortunately for those members who were paying attention, your portfolio didn’t suffer the same consequences.
Disclaimer: I’m not a financial advisor and this email should not be misunderstood as financial advice. I simply share my personal experience and what other members are doing to grow their net worth and protect cash flow, including strategies such as:
High-yield investments like real estate investment trusts, stocks or close-ended funds with strong balance sheets and clearly identifiable cash flows.
Real estate. This is a smart inflation hedge and, assuming strong leasing fundamentals, the continued cash flow king of the hill when it comes to markets like we saw in 2022.
Alternative assets like shares in a private equity group that is investing in new markets for Hearing and Brain Centers. We try not to toot our horn too loudly, because you can always lose your money when investing, but our group distributed $50,000 last week and our holdings were up somewhere in the neighborhood of 30% in Q4 last year, highlighting why private equity and venture capital are so attractive to high-net-worth and ultra high-net-worth households. We do not have to follow the broader markets up or down in these alternative asset spaces and we can move quickly to get deals done while banks are controlled by very different laws of gravity.
You Could Say We Saw This Coming
Almost everyone besides the Federal Reserve had a pretty good idea of what might happen when you print trillions of dollars and bail out every business and industry in the country. Surging inflation was no surprise but we were all a little gobsmacked by how long it took the Federal Reserve to raise interest rates. When they finally got around to it, they did it forcefully and relentlessly, like a tornado in a trailer park.
In 2022, we saw seven (count ’em, S-E-V-E-N) rate hikes, including four straight 0.75 point upticks. The last time we saw tightening this tight, Cheers had just ended and Seinfeld was the new hit show on NBC.
The Fed’s rate hikes have affected equity valuations as capital has become more expensive but they’ve also damaged bonds and other rate-sensitive instruments.
In the past, rate hikes and resulting capital losses were at least partially offset by coupon income. That’s pretty hard to do when bonds were paying next to nothing leading into the pandemic. Looking back, 2022 was a predictable perfect storm.
The big lessons for your practice and peak performance financially haven’t changed. They’re just back in vogue, thanks to the Federal Reserve finally recognizing the era of cheap money with low inflation is over. Write these down. Stick them to your forehead if you must but don’t forget them:
The cost of capital matters. Revenue is vanity. Profit is sanity. Cash flow is king.
Looking forward to helping you grow your legacy, and your retirement in 2023!
Jared