It was quite a turnaround in the markets compared to 2022! Large US stocks led the way with a return over 26%. Small and International stocks also did well, and US bonds even had a good year in the face of rising interest rates.
This year’s performance offers a great example of why we must take a long-term view when it comes to investing. Imagine cashing out at the end of 2022 after stocks lost over 18%. Perhaps you would have spent most (or all) of 2023 trying to pick the best time to get back in the market? Many folks in that situation might still be sitting on the sidelines. And unfortunately, losing even a single year of good stock returns can destroy long-term investment performance.
As evidenced by the chart below, it’s important to note that 2023 was no walk in the park for investors. We had two substantial drops of 7% and 10%. Ignoring the “noise” in the market is one of the most important skills of any long-term investor.
As usual, the key lesson is to make a plan and stick with it. Only in very rare circumstances should we seek to make big adjustments to our investment strategy.
Investing is often a battle against our own brain and feelings. I encourage everyone to browse the Wikipedia entry on cognitive biases. It offers a fascinating insight into the imperfect nature of our brains and cognition. Having a plan can help us make better decisions and avoid financial catastrophe.
How is the economy?
As we consider what might happen in 2024, here are some items to consider.
First, the economy continues to do well in many regards. To wit:
Labor markets remain robust… The mass layoffs in the tech sector from early 2023 have abated. The labor force participation rate continues to trend toward regaining pre-COVID levels.
Inflation has moderated… The Fed appears to have done the impossible by hammering down high inflation while not cratering economic growth (e.g. an economic “soft-landing”).
Financial market conditions remain benign… Corporate bond spreads remain near all-time lows. Stock market indices are at or very close to all-time highs. Real estate prices have held up extremely well.
Second, interest rates should offer less of a headwind. The Fed board has indicated that three interest drops are on the table in 2024. All else equal, lower rates should support higher asset prices.
The reason for this assertion relies on the simple principles of the time value of money. Interest rates are used to discount or devalue future cash flows from assets to the present day. After all, $1 today is worth more than $1 tomorrow, or in 10 years. Lower interest rates translate to lower discounts, which causes all of those future cash flows to increase in value in today’s environment.
Lower rates can also ameliorate the debt burden of the US Government and help the Fed reduce it’s balance sheet over time.
Unfortunately, there are some lingering concerns.
The election cycle could increase volatility… The political environment in the US is colorful to say the least. This dynamic could introduce above-normal volatility to the markets, especially later in the year as general election campaigning starts in earnest.
Housing affordability is terrible… Mortgage rates have moderated somewhat, but affordability indices persist near all-time lows.
Many people still think the economy stinks… As I mentioned at the end of last quarter, many Americans don’t “feel” like the economy is doing well. Whatever the cause, “animal spirits” (e.g. the feelings of economic participants) can have often have real effects on future performance of financial markets and economic indicators.
Planning updates
There are no major planning updates from the past few months. There are still multiple outstanding implementation issues around the Secure 2.0 Act. However, these issues mainly focus on the mechanics surrounding the administration of employer sponsored retirement plans. It will also be interesting to see how things develop with the tax code as we stare down a reversion to the older tax code starting in 2026.
Retirement contribution limits have increased in 2024:
HSAs:
Individuals $4,150
Family $8,300
+$1,000 catch-up per person over age 55 (both spouses can make a catch-up if family plan)
IRAs: $7,000 (+ $1,000 catch-up if over age 50)
Defined contribution plans (401k, 403b) have two limits:
$23,000 employee elective deferrals (+ $7,500 catch-up if over age 50)
$69,000 total limit1
If you want to keep a reference handy, I recommend the annual Putnam tax reference (located here).
1 The total limit applies to the combination of:
Employee elective deferrals (but not catch-up contributions)
Matthew Jenkins is the Founder of Noble Hill Planning LLC. Matthew has over 15 years of experience working in both large and small financial services firms. Before starting his career in finance, Matthew served as a U.S. Army Ranger. Matthew values transparency and fair dealing and enjoys helping people prepare for a great retirement.
2023 Year In Review
It was quite a turnaround in the markets compared to 2022! Large US stocks led the way with a return over 26%. Small and International stocks also did well, and US bonds even had a good year in the face of rising interest rates.
This year’s performance offers a great example of why we must take a long-term view when it comes to investing. Imagine cashing out at the end of 2022 after stocks lost over 18%. Perhaps you would have spent most (or all) of 2023 trying to pick the best time to get back in the market? Many folks in that situation might still be sitting on the sidelines. And unfortunately, losing even a single year of good stock returns can destroy long-term investment performance.
As evidenced by the chart below, it’s important to note that 2023 was no walk in the park for investors. We had two substantial drops of 7% and 10%. Ignoring the “noise” in the market is one of the most important skills of any long-term investor.
As usual, the key lesson is to make a plan and stick with it. Only in very rare circumstances should we seek to make big adjustments to our investment strategy.
Investing is often a battle against our own brain and feelings. I encourage everyone to browse the Wikipedia entry on cognitive biases. It offers a fascinating insight into the imperfect nature of our brains and cognition. Having a plan can help us make better decisions and avoid financial catastrophe.
How is the economy?
As we consider what might happen in 2024, here are some items to consider.
First, the economy continues to do well in many regards. To wit:
Second, interest rates should offer less of a headwind. The Fed board has indicated that three interest drops are on the table in 2024. All else equal, lower rates should support higher asset prices.
The reason for this assertion relies on the simple principles of the time value of money. Interest rates are used to discount or devalue future cash flows from assets to the present day. After all, $1 today is worth more than $1 tomorrow, or in 10 years. Lower interest rates translate to lower discounts, which causes all of those future cash flows to increase in value in today’s environment.
Lower rates can also ameliorate the debt burden of the US Government and help the Fed reduce it’s balance sheet over time.
Unfortunately, there are some lingering concerns.
Planning updates
There are no major planning updates from the past few months. There are still multiple outstanding implementation issues around the Secure 2.0 Act. However, these issues mainly focus on the mechanics surrounding the administration of employer sponsored retirement plans. It will also be interesting to see how things develop with the tax code as we stare down a reversion to the older tax code starting in 2026.
Retirement contribution limits have increased in 2024:
If you want to keep a reference handy, I recommend the annual Putnam tax reference (located here).
1 The total limit applies to the combination of:
Matthew P. Jenkins, CFA, CFP®
Matthew Jenkins is the Founder of Noble Hill Planning LLC. Matthew has over 15 years of experience working in both large and small financial services firms. Before starting his career in finance, Matthew served as a U.S. Army Ranger. Matthew values transparency and fair dealing and enjoys helping people prepare for a great retirement.
Matthew is a CFA® Charterholder and CERTIFIED FINANCIAL PLANNER™ Professional. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and the Fee Only Network.