4th Quarter Client Note – Who Woulda Thunk It?

2023 began on the heels of one of the worst years both stock and bond markets have seen. Here is a bleak reminder:

Beginning in March of 2022, to combat rising inflation, the Fed hiked interest rates seven times. By October of this year the 10-year Treasury yield had topped 5% for the first time since 2007. But has since receded closer to 4%.

In 2022, The S&P 500 Index fell 18%. The US Aggregate Bond Index lost 13%. Needless to say, balanced portfolios, the lifeblood of a rational investment strategy, performed poorly.

Doomsday Scenario?

2023 began with inflation at 6.5%.  (Since, fallen to 3.4%) Interest rates were still rising. The war in Ukraine raged on. Silicon Valley Bank went bust. War broke out in the Middle East in October. And most Wall St. analysts were calling for a recession and poor stock market returns.

And yet…the S&P 500 (Total Return) Index gained 26.29% for the year. The prognosticators could not have been more wrong.

Magnificent Seven Rein

Just when it appeared that value stocks might once again have their day in the sun, the lion’s share (two-third’s) of the S&P’s gains were fueled by the Magnificent Seven. Nvidia (the AI champ) alone gained 239%. Large growth stocks gained a whopping 42% for the year. While Large Value managed to gain 11.5%. Thankfully, toward the end of the year, the rally broadened to include smaller stocks; with the Russell 2000 being up 20% in the last two months.

Fixed Income

And despite all the interest rate increases, bonds manage to have a positive year, with the Bloomberg US Aggregate Bond Index gaining 5.53%.

Like clockwork, our friends at Dimensional Funds provide all the details for the quarter and the year in their Quarterly Market Review.

Another Investing Legend Passes

Seems like every quarter these days a giant from the investing world sadly passes away. But at least it gives me something to write about. This time it was Charlie Munger, Warren Buffett’s sidekick and right-hand man.

Buffett is well known for his aphorisms. But Munger was no slouch, either. One of my favorites:

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. 

A Little Rain on Your Parade?

If you are age 73 or older you must begin taking Required Minimum Distributions (RMDs) from your IRA or 401k. These distributions are calculated based on your year-end, December 31, 2023 values. Higher RMDs for retirees have both lifestyle and the potential tax consequences. They are taxed at your marginal tax rate and can affect other financial consequences, known as the “tax bomb.”

First, if you don’t need all those after-tax withdrawal funds for lifestyle expenses, you can reinvest some of it in your taxable account. You don’t have to spend it all. You can also take advantage of Qualified Charitable Contributions (QCDs) to lower your tax liability.

And taking your RMDs presents an excellent opportunity to evaluate your portfolio for rebalancing opportunities. For example, international equities haven’t enjoyed nearly the success that US equities have. Valuations are substantially lower. So, it might make sense to sell some of your winners to fund your withdrawals.

I Hate Forecasts – But Here We Go

I rant and rave about the use of forecasting to dictate investment strategy. But that is more about short-term prediction addiction. Unemployment remains low. The Fed appears to be getting inflation under control. And they might successfully engineer a “soft landing.” The market expects the Fed to lower rates in 2024. But, who knows?

Election Wild Card

Not to mention what is bound to be another hotly contested Presidential election. This guy actually predicted the January 6 debacle three months in advance.

But, for better or worse, we have to use capital market assumptions to give us some guidance in connection with long-term financial planning; meaning 10 – 15 year time horizons.

Diversification is Always Having to Say You’re Sorry

In addition to Charlie Munger, there was another recent passing. Ryan O’Neil, who starred in the movie Love Story, with Ali McGraw, when I was in Junior High. The most famous line in the movie: Love means never having to say you’re sorry.

O’Neil’s death reminded me of one of my favorite investment aphorisms: Diversification is Always Having to Say You’re Sorry

When you have a diversified portfolio, you will always own the some of the best performing asset class. But, by definition, you will own some duds. It goes with the territory.

The future is as uncertain as it has ever been. Especially if you are locked into short-term thinking as far as your investments are concerned.

We think balanced portfolios still make a good deal of sense for most investors.

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