2023 — Another example that no one can predict the market. We invest every quarter, no matter what.
The mystic stock market hand of wisdom?
2023 goes down as a classic example of how no one can predict the economy or the stock market. The Wall Street Journal’s headline on Dec 29, 2023 was:
The Wall Street Journal:
“What Did Wall Street Get Right About Markets This Year? Not Much”
2023 on paper, looked like a shit sandwich for us investors. The Federal Reserve raised interest rates at the fastest pace since the 1980s to crush inflation; we had regional bank failures and wars in Europe and the Middle East.
Economists, ‘expert’ commentators, and your next-door neighbor were all convinced there would be a recession (that’s two-quarters of negative economic growth), rising unemployment, and a resulting stock market bloodbath.
So what happened?
In the end, the Fed’s campaign of higher interest rates, along with the easing of supply chain issues, lowered inflation. The economy grew by 3.1%, and the labor market remained healthy. Consumers kept spending. Most economists were dumbfounded. It just isn’t supposed to work that way when the Fed raises rates. Also, the unfortunate wars in Ukraine and Gaza didn’t spread to a regional conflict, so gas prices didn't go through the roof. Goldilocks got her ‘just right’ economy.
The result for investors?
Everyone who predicted economic trouble and adjusted their portfolio accordingly by selling or not continuing to buy got hosed. Those of us who stayed with the plan, buying our funds every quarter, crushed it. The U.S. Broad Market ETF that we use in the Three-Fund Portfolio (Schwab SCHB or Vanguard VTI) was up around 24%. If you had $100,000 invested at the start of 2023, now it’s $124,000. The funds also pay a 1.4% yield (think of yield as interest on a bank account).
The red arrows were our buy dates at the start of every quarter. We buy four times a year in the i401k Three-Fund Portfolio
I know a colleague who pulled everything out of his stock market portfolio at the end of 2022 and sat in cash. He was convinced that the market would plunge. This is called market timing; it leads to the dark side, pain, and suffering. The problem he has is, now what? Does he stay out or get back in? The psychological stress just isn’t worth it.
What if the market had dropped like a stone?
Our i401k balance would have dropped, but we would have kept buying every quarter, picking up our funds at cheaper prices. Remember, the market has an upward bias and goes up 2/3 of the time and down 1/3 of the time. We always get the recovery eventually. However, if you are five years out from retirement, I suggest seeing an advice-only financial advisor to get a retirement plan going, as you may not be able to wait for the market to recover. You will need to start spending your assets in retirement.
What am I getting at here?
Stay in, and don’t try to time the market by selling and sitting on the sidelines.
Don’t give in to emotion; the primitive side of your brain is telling you to run when the news is bad or the market is tanking.
Keep buying every quarter, this is called ‘dollar cost averaging’. In 2023 we bought in every three months and captured a lot of those gains.
If you haven’t read The Knowledge post on the stock market, give it a go. In the long term, the market is more simple and less scary than you think.
Vanguard VTSAX Total US Stock Market. Long term from 2002-2022, look at it go.
What will 2024 bring?
No one really knows, even though the usual predictions will abound. What we do know is staying invested long-term, buying every quarter works. SCHB’s (Schwab US Broad Market’s annualized return (the average it has made every year) since the ETF began in 2009 is 13.28%. Vanguard VTI 15-year average return per year is 14.24%.
If you want to read some insightful musing on investing and the market I recommend Howard Marks from Oaktree. He is one of the wisest, no-bull investors around today. His occasional memos are free for us mere mortals. You can sign up here.
If you haven’t already, kick off your i401k. It’s up to a $76,500 tax deduction per year. At a 7-8% annual gain you will get rich slow and can easily have over a $1,000,000 by the time you retire.