Tudor November 2022 Commentary
Research-Based Investing and Guidance Since 1992
High-Level Financial Care for Clients in Over 30 States
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2022 Lessons Learned
Improve Investment Outcomes with These Thoughts
With one month left in the year, markets have had headwinds on multiple fronts. But all is not lost as post-COVID business and consumer logistics have largely unjammed, the Federal Reserve is hinting at less aggressive tightening and the S&P 500 trades 15% above its twelve month low.(1) A casual lookback shows that much about the year has been instructive.
2022 is chock full of investment lessons for those looking to add to their investment knowledge playbook. Many lessons in 2022 were kind enough to confirm our investment philosophies well.
Have a Valuation Metric: Why invest in anything unless you know "that thing" is a good price? In 2021, not much was available at decent prices as the year came to a close. Based on our metrics, markets were clearly overvalued partly from a spillover of COVID stimulus dollars. Our valuation metrics over the last few years: March 2020 - markets cheap. December 2021 - markets expensive. November 2022 - markets neutral.
Because Valuations Matter: It's important to develop a gauge for valuations because valuations matter. Markets trade in a wide range and often overshoot on the upside and downside. It takes time for short-term, emotionally-driven upside enthusiasm and downside gloom to wear off, but valuations slowly migrate back to trendline over time. Valuation metrics help investors know when securities are well above and below rational valuations.
Lesson: Flip human nature on its head. Buy after declines when fearful and consider sales when high valuations suggest excessive enthusiasm and euphoria.
Diversification Overload: We track fifteen major asset classes (large domestic stocks, bonds, commodities, international stocks, emerging markets, etc.) covering a wide investment spectrum available for investment allocation. Diversification - spreading investment dollars across a wide swath of investment choices - is the holy grail of the investment world used heavily by well-known financial firms and automated (robo) investment services. Investors implement diversification by allocating across many of these fifteen categories.
Mindless Diversification: Yes, diversification can reduce period to period volatility, but the downside: wide diversification dilutes long term returns and excessive diversification across many asset classes is simply "vegetable soup" investing that adds no value.
Diversification in 2022: Fourteen of fifteen major asset classes we track have shown double-digit declines from their highs in 2022.(1)(2) The same phenomenon occurred in the last quarter of 2018 in conjunction with tariff talk and federal reserve interest rate chatter, and once again in March 2020 with COVID concerns. In all three periods, asset classes moved down in lockstep.(1) Diversification is no guarantee for smoother short-term outcomes.
Lesson: Concentrating portfolios in a smaller number of highly-ranked, closely monitored securities is an effective alternative to wide diversification.
Basement Traders and Meme Stocks: With lots of government-provided COVID safety net money sloshing around in 2021, that year began with a bang in securities known as "meme" stocks. New smartphone apps allowed newbie investors to trade securities quickly and efficiently on their phones. Nearly bankrupt companies became trading fodder for these traders: stocks included Gamestop (which rose 100 times over several months), AMC Entertainment, Bed, Bath and Beyond and others. Parabolic rises created wealth quickly, but as the year came to a close, these same traders lost much of their gains and this continued into 2022.
Lesson: If an investment approach works for only a period of time and then implodes, it's an investment fad not a strategy.
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Crypto Turmoil: Bitcoin is one of hundreds of cryptocurrencies in recent years "created" by computer algorithms. Although some disagree, we don't refer to it as an asset class - in our view, it is a digitized trading phenomenon. Proponents argue for its merits as a widespread medium of exchange and an inflation hedge. Neither has been realized.
1. El Salvador is the only country to establish crypto as a means of exchange (legal tender). The country is suffering a debt crisis, nearly in default, and has incurred deepening losses as it latched onto crypto.(4) The country may seek a bailout over the next year if conditions fail to improve.
2. Bitcoin's nearly 75% decline from its high does not qualify it as a hedge against inflation (a common and unsubstantiated claim in recent years), but rather confirms it's nature as a volatile trading phenomenon.(1)
3. Crypto has not been adopted as a legitimate means of exchange in the U.S. And, in recent years Crypto has been used extensively in criminal activities.(3)
4. The recent failure of crypto trading platform FTX, with an estimated million creditors wiped out, including a large number of very notable financial institutions that latched onto Crypto, further confirms the risks of diving into any unregulated world.
The lesson: Be wary of narratives that gain wide following but have little substance. A wide following of anything is no guarantee that an idea is worthy of consideration or action. Large, established financial institutions are often drawn in by narratives, and they are not immune to following crowds to poor outcomes.
And on the inflation topic we have...
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The Myth: Gold is a High-Returning Investment Choice that
Also Fights Inflation
Ah gold. The ultimate inflation hedge.
However, this year not so much (and prior history not so much).
Within the investment community, gold has nearly always been viewed and historically used as an inflation fighter. But so often when it matters most, as it has in 2022, gold fails in this mythical role.
If inflation protection was needed in any year, this was the year. Yet gold, with an 18% decline(1) from it's high, has been far from an inflation hedge this year. And according to Deutsche Bank's Long Term Asset Return study, its returns from 1900-2020 averaged only 3.84% - hardly enough to offset inflation. Like crypto, it provides no dividends, interest or company profits, making it an unreliable investment choice - and especially so when you expect it to perform in an inflation-riddled year.
Lesson: Some myths never die.
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A Great Decision in
2022 for Growth-Oriented Investors
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While all fifteen major investment asset classes we track are showing declines in 2022 (cash, the exception, is breakeven), there is one move investors could have made in 2022 that would have improved relative performance in the year.
Investors that recognized the speculation of large growth stocks in 2021 and migrated to what are referred to as large value stocks at the beginning of 2022 would be doing well on a relative basis this year. Growth stocks are exciting, value stocks are inherently boring. 2021 was all about speculation and excitement, 2022 all about hunkering down and preservation. Our models have favored large value since late 2021.
Relative outperformance of value over growth year-to-date in 2022 is significant - with large value outperforming growth by 25%. (SCHG vs SCHD 1/1/2022 to 11/30/2022)(1)
How many caught that transition?
Lesson: You got to know when to hold 'em and know when to fold 'em.
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What Do These Numbers Show?
-15.4%, -14.4%, -14.6%(1)
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Investors often have the illusion that one fund company has some inherent qualities that make it better than other fund companies. Fund companies are mutual fund and ETF supermarkets...superiority is an illusion. Mutual funds are merely tools (as are ETF's) and their performance is driven by the underlying stated objective of the funds. Funds can invest in almost any asset category, but funds investing in the same category will have very similar outcomes.
The respective year-to-date returns above are for a Schwab bond fund, a Vanguard bond fund and a Fidelity bond fund. The performance differences between them is a rounding error - very small. All suffering declines in lockstep.
When the Federal Reserve raises interest rates aggressively, (as they have this year) ALL bond funds decline and there are no bragging rights that can be trumpeted by any fund company. The same is true for similar mutual funds (or ETF's) offered by fund companies invested in any asset category. We have to recognize securities and funds as investment tools and not ascribe genius to any fund company that offers those tools.
Lesson: The allocation skill of an investment manager determines long-term outcomes while funds and securities are merely tools in the process.
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401(k) Management Services |
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Retirement readiness is a very long process involving decades.
Over time, preparations for this long phase of life has been delegated over from companies to employees who are now fully in charge of their savings rates, investment allocations and retirement readiness.
Decades ago, pensions covered a wider swath of the population, but companies in greater numbers have pushed retirement responsibilities onto the shoulders of employees as 401(k), 403(b) and 457 plans have grown to replace pensions. We note that the average 401(k) balance at Fidelity for the third quarter of 2022 is $97,200, not enough to get through 20 years of retirement.(5)
Clients often request that we provide oversight for their company retirement accounts and we have provided this service over the last ten years. In recent years, regulatory changes and online security created challenges to help clients with these types of accounts.
We are now introducing a better approach to our
RetirementTrack 401(k) management service.
This service provides direct oversight for client
employer-sponsored retirement accounts such as 401(k)'s.
Our newest technology now provides a direct link to outside held accounts. This direct link allows us to help clients allocate and adjust their accounts based on our evolving investment models.
If you have an interest or are aware of employees looking for disciplined management of their 401(k) employer account (with retirement planning included) please contact Adam Donaldson at: [email protected] to establish this service.
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"It's better to be financially unbreakable."
Morgan Housel
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Dow Industrial Index
March 23, 2020 - 18,214 (2020 low)
November 30, 2022 - 34,590(1)
90% Gain
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Grant S. Donaldson, MS, CPA |
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(1) yahoofinance.com, S&P500 historical data, Barrons, Morningstar.com, Vanguard benchmark returns
(2) Information available upon request
(3) https://www.reuters.com/markets/us/cryptocurrency-crime-2021-hits-all-time-high-value-chainalysis-2022-01-06/
(4) https://www.cnbc.com/2022/06/25/el-salvador-bitcoin-experiment-not-saving-countrys-finances.html
(5) https://www.cnbc.com/2022/11/17/401k-balances-fell-23percent-year-over-year-due-to-market-volatility-
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Past performance is not indicative of future results. Nothing in this communication should be construed to contain a solicitation to buy or an offer to sell any security. Some information contained in this communication has been provided by sources other than Tudor Financial, Inc., the accuracy of which is the responsibility of the provider. Advisors affiliated with Tudor Financial are Registered Reps. of Westminster Financial Securities, Inc.,40 North Main Street, Suite 2400, Dayton, Ohio 45423, member FINRA/SIPC. If you would like a copy of our Schedule ADV Brochure, a written disclosure statement outlining our background and business practices, please contact our office. |
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