2022 has been a tumultuous year for the markets. After surviving COVID, the S&P 500 saw a gain of over 25% in 2021. Now, with inflation spiking to levels not seen in decades and the Fed hiking interest rates, markets have been down across the board in 2022. The S&P 500 is down 14% year to date (YTD).
Other assets are off even more – the Nasdaq index, which primarily consists of growth stocks, is down 24% YTD. The FAANG stocks have generally been worse – Meta (fka Facebook) is down 44%, Amazon is off 31%, Netflix is off 32%, and Google is down 27%; with only Apple beating the Nasdaq index with a YTD return of -9%. COVID darlings like Peloton and Zoom are worse still, off 65% and 52% YTD, respectively.
In crypto, it’s more of the same with staples like Ethereum and Bitcoin off 52% and 38%, respectively. The DeFi Pulse Index (comprised of tokens backing DeFi protocols) is off 65% for the year. We’ve seen Do Kwon’s LUNA/UST tokens essentially go to zero from a market cap of $40bn.
This backdrop can make even the most steady and experienced investors nervous, which means it’s probably a good time to take a step back and make sure you have a game plan.
Stick to the Plan
To quote famous chess player Garry Kasparov, “it is better to have a bad plan than no plan.”
This certainly holds true when it comes to investing. Market moves like this can cause people to get emotional. If you have a game plan, you’re more likely to stick to it and not make reactional mistakes.
We recommend thinking about your investments in buckets. The first bucket, and likely one of the most important, is your rainy day fund. Depending on your situation, it’s a good idea to have the equivalent of 3-6 months worth of expenses saved. Think about a scenario where there is a recession and you lose your job. Not only will the rainy day fund make you less stressed and give you some breathing room in that moment, but it will also allow you to search for the right next job and not be forced to take the first opportunity that comes your way (less relevant for a freelancer but you get the idea). These savings should be in a checking account or a savings account where there is no risk of loss – you don’t want them to decline in value right as you need them. They also should be accessible on short notice – if they’re in a CD where they’re locked up for some period of time they won’t be of any use to you when you actually need them. While banks haven’t been paying much on checking or savings accounts recently, it’s starting to get better as the Fed hikes interest rates. There are also alternative lenders that typically provide higher interest rates than banks. For example, you can earn 0.85% on a savings account with Marcus from Goldman Sachs (link).
Your second bucket should consist of savings for large expenses that you know are coming up. Need to buy an engagement ring? Saving for a wedding? Looking to buy a house in the near future? For large expenses that you’ll need to pay in the next few months or even years, you should be more conservatively invested. For example, if you went into 2022 looking to buy a house and had your money in the stock market, the YTD declines could have made your dream house suddenly unaffordable. Because you know you’ll need to pay them soon, these should be conservatively invested. However, since you know the approximate date you’ll have to pay them (whereas we don’t know when exactly we’ll need our rainy day fund), you can utilize something like a CD which pays you a higher return for agreeing to lock up your money for a certain amount of time.
The last bucket is savings for long term needs like retirement or your child’s education. While every person has a different risk tolerance, this is the bucket where you can take the most risk. This likely means some combination of equities (riskier) and bonds (less risky). The traditional advice is that when you’re younger your portfolio will be invested in more risky assets to try to achieve a higher return as you have the longest investment horizon (retirement is further away). As you get closer to retirement, you’d shift your portfolio to more conservative investments. All of this depends on your risk tolerances though. You can work with a financial advisor, or if you prefer there are cheaper robo-advisors now, to help find your ideal asset allocation for your investment portfolios. There are also tax-advantaged vehicles for this type of saving: for retirement you should be making use of 401(k)s/IRAs and for education you should use a 529 plan. These allow you to grow your investments without paying capital gains taxes, and for retirement savings you’ll also defer income taxes (depending on whether you choose a traditional IRA or a Roth IRA). You can find more details on these vehicles in our blog post “An Overview of Retirement Vehicles” (link).
Don’t Day Trade
Once you have a plan and an investment strategy, stick to it! Don’t let the moves in the market sway you. You might have down years (like 2022), but over the long term your plan will work. Deviations from the plan will likely only hurt you.
JPM Asset Management did a study (link) that showed if you invested $10,000 on January 3, 2000 that you would have ended up with $32,421 at the end of 2019, for an annualized return of over 6% per year. This period includes 5,000 days of stock market trading. However, if you had missed the 10 best days during that period, you would have only ended with only $16,180, or less than half of the returns!
While a market downturn may make you want to pull your money, consider the advice from Warren Buffet – “be fearful when others are greedy, and greedy when others are fearful.” Downturns are likely to be followed by swings back up (eventually). It’s impossible to time market tops and bottoms, especially if you’re not doing this for a living. The wiser decision would be to invest a little bit every month towards your long term savings goals, that way you’ll average in your cost basis at lower prices during the down markets without having to perfectly time the bottom.
If you’re not a market professional, it’s also wise to use diversification to your advantage. There are many low cost index providers that can give you exposure to sectors/themes that you want to invest in across a variety of names. This minimizes the chance that any one wrong investment will blow up your portfolio.
Where Do We Go From Here?
People tend to extrapolate the last decade’s return into the future, and this usually ends up being incorrect. We had a massive bull run from 2010 through 2022 that was helped by fiscal (government spending) and monetary (the Fed cutting interest rates and performing quantitative easing) stimulus. No one knows what the next decade will hold, but ideally the Fed will hike interest rates enough to slow down inflation without causing the economy to crash. If they don’t, we could see inflation like the 1970s or see a recession on the horizon. Financial advisors can help you navigate these challenges, but they do charge fees for their services. Just remember that while there may be volatility and ups-and-downs along the way, over the long term markets tend to go up. If you have your savings bucketed in alignment with your spending needs, you’ll be able to stick to your plan and ignore the ups-and-downs. When the markets are going down, stick to your plan and don’t let your emotions get the best of you!
As always, feel free to email us at firstname.lastname@example.org if we can answer any questions, and good luck out there!