If you want more money, you should campaign to make 2023 just like 2022

By Francis Bayes, WCI columnist

For many reasons, 2022 has not been good for the average American’s wallet and retirement prospects. But this site is intended for healthcare professionals, other high-income professionals, and trainees who most likely have (or currently have) household incomes above the national average. This website’s audience (ie you) is not your average American. For you, 2022 may have been an opportunity or a relief because of your high savings rate or large margin of safety.

Even if 2022 was a missed opportunity, we cannot change the past. Some of us were unlucky enough to start investing during the bubble. We can currently only control our financial plan. Is your financial plan prepared for another year 2022? Would your financial plan call for 2022 rather than 2021?

This column is my hot take for 2023: Whether someone is an earner, a saver, a producer, or a keeper—according to Michael Kitces’ framework (Table 1)—those who follow the core principles of the WCI Fellowship should so desire financially Markets in 2023 are like 2022, not 2021.

(To be clear, I don’t want inflation to go back up, another war, or even the long-awaited recession. I’m talking about the markets for stocks, bonds, real estate, etc. For example, we should want another 10%-20 % drop in the stock market. But I’d rather have the markets of 2021 if that means inflation falls to 2% and the war in Ukraine ends.)

For earners and savers: You can still buy shares on offer

Thanks to my wife, who is the main breadwinner and works as a counselor, I can claim to be a part of both ‘earners’ and ‘savers’. On the surface, my wife and I lost a lot of money in 2022. In January, we made lump sum payments into our Roth IRAs and bought broad-market stock index funds (rather than dollar-cost-average). We continued to buy bitcoin and ether throughout the year, although its price fell too fast to allocate up to 2% of our portfolio (OK, I was responsible for her losing money).

Our portfolio is 98% equities, but even if we had owned bonds, we wouldn’t have fared much better. Our money-weighted YTD return was around -9% (it helped overweight small-cap stocks!). The YTD return of the Vanguard Target 2055 Fund, which is 91% equities and 9% bonds, was around -14%. Nevertheless, 2022 was a great year for us because we continued to buy socks on sale.

Sorry, I meant stocks. It turns out that Jason Zweig is right. It sounds better when I say socks on sale.

These Stonks Socks stocks (i.e., broad market index funds) should be held for at least 20 years, as the stocks have never had a negative return in any 20-year period. As Cullen Roche argues, when we buy stocks in our retirement accounts, we should think we’re buying a bond that matures in 20 years — that is, a loan that won’t be repaid to you for 20 years. Just as we can sell bonds in the secondary market, we can sell our stocks in our retirement accounts. But we should understand that the penalty is excessive because the moment we sell, we forfeit the historical guarantee of a positive return.

If you’re 30 like me, we shouldn’t worry about the stocks we’re buying today until we’re 50. Of course, anything can happen, and the stock markets’ unbeaten streak of 20 years could end at some point. If after 20 years our shares are worth less than expected, our future selves might have a little to worry about. However, the likelihood of such a scenario is reduced when stocks are cheaper today (ie valuations are lower), since lower valuations are associated with higher future returns. This means that our future selves are likely to worry less about the stocks we bought in 2022 than we did about those in 2021. If 2023 is like 2022 and stocks get even cheaper, our future worries will become less likely.

If the stock market falls in 2023, remember that we should worry less now because we will worry less going forward.

For savers and growers: you can be greedy while others are fearful

It will not be easy for most people to maintain their asset allocation through another bearish year. If the current uptrend (as of this writing) is another “bear market rally,” their belief in stocks will continue to erode. The interest rates will be too attractive for their high-yield savings account and pension funds. Sales pitches about alternative investments are getting louder. But if stock prices aren’t rising at the rate of earnings growth (ie, valuations are falling), savers and makers might want to consider increasing their allocation to stocks.

Is that sacrilege? In his book Rational Expectations, Dr. William Bernstein suggests that strategic asset allocation may be appropriate during bubbles and market crashes. He defines strategic asset allocation as “small, infrequent changes in allocation versus large changes in valuation”. You don’t have to change your asset allocation every year, but 2022-2023 could be a historic opportunity. For example, in December 2022, professional investors were the largest overweight in bonds versus equities since March 2009. If others are too conservative, long-term savers should be bolder in their allocation to 20-year bond-like assets like equities. Discussing strategic asset allocation is beyond the scope of this column (although WCI now has a book on it), but if 2023 is more like 2022 than 2021, savers and producers can take the time to learn more about it and implement it.

For Producers and Keepers: You can better align your liability

dr Anthony Ellis may disagree. . . but how much luckier can the boomers get? They experienced a historic bull market during their peak years (technically we’re still in a “secular bull market”). Depending on where you live, the value of your home may have increased as well. They could have both been riding waves and correcting each of their previous mistakes.

I don’t want inflation to go back up because inflation can be devastating to Keepers. However, Keepers can now buy Treasury bills and notes (not bonds!) at 4% nominal and TIPS with positive real yields. You can buy enough Treasury bills, bonds, and TIPS to survive any risk of a string of returns AND exit your portfolio at a real interest rate of 4%. Allan Roth demonstrates how to create a 30-year TIPS ladder, and Big ERN declares back the 4% withdrawal (guideline, not rule!).

While I don’t plan on having Treasuries in my retirement portfolio for a while, I do have a bit of skin in the game now that my parents are nearing retirement. Your TreasuryDirect accounts are no longer just holding I-Bonds. For your sake, I want interest rates to continue to be higher than interest rates will be in 2021.

Even if you want to leave your heirs (or charities) some money, the strategy for covering their short-term debt in 2022 may be more versatile than in 2021 due to current interest rates. You can protect yourself from another year of unexpected inflation and still have one Income. You can buy three-month Treasury bills, which at this point have higher yields than 10-year Treasury bills; and depending on how interest rates change, they can roll them over at higher rates or reinvest their capital in higher-rate, longer-dated government bonds.

For example, you might want to live on $100,000 in 2022 (their desired liability), but in the worst case you only need $60,000 (their true liability). You can buy a mix of TIPS and Treasuries with $100,000 in $2022. Five years later they will want more than $100,000 face value (ie in 2027 dollars) because of inflation. If the total return on their mix of TIPS and Treasuries is less than the difference between $100,000 in 2027 and $100,000 in 2022, they may have to live on less or sell some stocks.

Either way, they would sacrifice less income or stock by covering their liabilities in late 2022 rather than 2021. The likelihood that they would have less than $60,000 in 2022 is also lower. This is because current bond yields predict future returns. For its liabilities going forward, by the end of 2023 they should want similar yields as today.

‘Do nothing, just stand there’. . . Unless you don’t have a good plan

Saint Jack Bogle is right, but only if your financial plan upholds its principles. In reality, such readers need not wish for 2023 to be like every year. Even in 2019. You are ready for any market because you stick to your plan.

For those for whom the 2022 shutdown has been painful, give yourself a pass, especially if you’re an earner or saver. The past three years have been a unique time in the financial markets for many of us. To err is human! Countless people have shared on WCI blogs, forums, and podcasts how they overcame their mistakes and achieved financial milestones. As the OG WCI puts it, “a doctor’s income masks a multitude of mistakes.”

While others are still licking their wounds, you can create a good financial plan to take advantage of what’s coming next—not just in 2023, but for your next phase of saving for financial independence.

Would you rather 2023 be like 2022, or would you like a repeat of 2021? If the bear market continues, will you buy stocks that are for sale? Can or should one be greedy when others are fearful? Comment below!