2022 Year In Review

What can we learn from 2022?

Stay focused on the long-term

For most people, suffice it to say that if they went to sleep on December 31, 2021 and woke up one year later, then one look at their investment portfolio might make them want to go right back to sleep.

But as long-term investors we must never look at a single day, week, month, quarter, or year in isolation. As Charlie Munger once said, “The big money isn’t in the buying and selling, but in the waiting.” After a year like 2022, it’s important to refocus on the “waiting” and the importance of patience when it comes to investing. Take look at the chart above. Yes, the 1 year numbers are terrible. But the 10 year numbers offer hope. A focus on the long-term is essential to investment success.

Limit bad decisions

Another good lesson from 2022 is to avoid making bad financial decisions. As with pretty much every other year in human history, 2022 offered a myriad of catastrophes, dangers, and risks. To name a few:

• Russia started a major land war on Europe’s front porch and tested the strength of post-WW2 alliances that were long taken for granted. The War drove higher food and energy prices and offered more fuel to the inflationary fire started by COVID supply disruptions.
• COVID continues to rage and now enters its fifth calendar year (going back to late 2019) and in many ways is just as bad as ever (just ask China). What’s more, much of the US has now entered a “tripledemic” with the resurgence of both RSV and the Flu.
• The Federal Reserve raised interest rates at the fastest pace in a long time. The specter of higher rates sparked predictions of a serious recession and generally blew a giant hole in housing affordability.

Any or all of these events might make you want to liquidate your investment portfolio and stash your money in a mattress.

But if you are familiar with the work of Daniel Kahneman and Amos Tversky (the pioneers of behavioral economics), then you know that generally people are terrible at making all sorts of financial decisions. We are emotional, impulsive, and our brains are always taking shortcuts, which can often lead to faulty conclusions and bad decisions. In short, we are generally our own worst enemies when it comes to dealing with money and investing.

So what can we do about it?

• We can be aware of and accepting of our shortcomings.
• We can avoid making decisions under duress.
• We can also actively limit the number of decisions or actions that we are required to make.

Or put another way… we must stay humble, don’t panic, and when in doubt, do nothing. The more we can protect against bad decision making, the better chance we have of avoiding major financial mistakes.

Don’t take unnecessary risk

Crypto investors encountered a perfect storm in 2022. Not only did the market value of Bitcoin and other crypto assets plummet, but many investors lost everything when companies like FTX collapsed.

With the benefit of hindsight, I often wonder if many of these investors truly understood the risks they were facing. First, they were taking on the massive volatility of Bitcoin. And on top of that, they ran the risk that the company safeguarding their assets might crumble (see this post from back in May).

Why would anyone take on that level of risk? Greed? Perhaps. Get rich quick? Maybe.

Whatever the reason, the results have led to financial devastation for many.

The takeaway here is that we must avoid unnecessary risks. As I mentioned earlier, humans are terrible at making financial decisions and that includes assessing risk. Certainly, life is inherently risky. And we must take on some risk to achieve our financial goals. But we should always seek to effectively manage our risk and ensure that we don’t put ourselves in the path of a financial ruin.

Economic Update

If you read my market commentary from last quarter, then you’ll have a good idea about where the economy is now.

The Federal Reserve continues to fight inflation by raising interest rates and shrinking its balance sheet.

Labor markets remain strong, although there are signs of weakness in certain industries (e.g. technology). Companies like Google and Facebook have started reducing headcount, which would have been unimaginable even 12 months ago.

Housing affordability is about as bad as it has ever been in the US and many other developed nations. Higher mortgage rates, combined with already elevated sale prices, will likely limit sales activity in the housing market for the time being.

China has also seen an explosion of COVID cases as governmental authorities abandoned their “COVID Zero” approach. It will be important to observe how the progression of COVID in China will affect the Chinese healthcare system and economy, as well as global supply chains.

SECURE 2.0

Prior to the end of 2022, Congress passed the widely anticipated updates to retirement savings law, commonly referred to as SECURE 2.0.

Here are the major changes:

• Roth Changes:
  • No more RMDs for Roth assets in qualified plans (e.g. 401(k))
  • New Roth versions of SIMPLE and SEP IRAs
  • Employers can make Roth contributions to an employee’s qualified retirement plan account
  • Some highly compensated employees can only make Roth catch-up contributions starting in 2024
• 529 account owners can transfer excess assets to a Roth IRA starting in 2024, subject to a $35,000 lifetime limit.
• A surviving spouse can now elect to be treated the same under IRS rules as the deceased spouse when inheriting a retirement account.
• Limits on both IRA catch-up contributions and Qualified Charitable Distributions (QCDs) will be indexed to inflation starting in 2024.
• The RMD starting age increased from 72 to 73 for individuals who turn 72 in 2023 and remain at age 73 until 2033 at which point the age will increase again to 75.
• The penalty for failing to take an RMD will decrease from 50% to 25%. If the shortfall is fixed within the “Correction Window” then the penalty is reduced further to 10%.

It’s important to mention that there were no changes to the rules around back door Roth or mega back door Roth contributions or Roth conversions. These strategies remain available.

There were a ton of other changes to the rules around 401(k) plans and special needs planning, but I’m not going to go into the weeds on those here. For a full, in-depth walk-through, check out this article.

Looking Forward

Predictions about the future are often useless. The so called “experts” are happy to prognosticate about what will happen in the future, but the fact is, they don’t have a clue. Everyone’s crystal ball is foggy, mine included. Anyone that says different is either misguided or misleading.

I wish I could offer a useful forecast about what the stock market or economy will do in 2023, but I can’t. Jeff Bezos and Elon Musk believe there will be a significant recession in 2023, but who knows? Will the stock market go up or down in 2023, your guess is as good as mine.

The best course of action as we embark on a new year is to make sure you have a solid financial plan. If you need to update it, do so. If you don’t have a plan, write one down.

Once your plan is set, stick with it. Focus on the things you can control like building relationships, developing life or career skills, proactive tax planning, maintaining an efficient and low-cost investment portfolio, or even just going for a walk. And don’t worry about what you can’t control, all of that will take care of itself.

I wish you all a healthy, happy, and prosperous New Year!