We can probably all agree that 2022, financially, was not the year we had hoped for–especially after opening your last statement. The year before (2021) was fantastic, and in January, we looked on with confidence that the new year might not turn out as incredible as 2021, but that it would follow up with some pretty good returns. Many “financial experts” predicted a positive 10% or so return in 2022.
Well, in the end, it wasn’t even close. Nothing grows to the sky, and nothing in the market rides up a straight line. That we consistently believe that this year will be like the last is called recency bias. It is a cognitive bias in our thinking that favors recent events over historical ones. It is a natural survival instinct. (Our pre-historic ancestors did not have the luxury of studying history—they survived by living in the moment. They didn’t have to worry about paying for retirement either.)
We are lucky enough to be living in the 21st century. Since, on average, we live much longer than our hunter-gatherer ancestors, we cannot afford to live in the moment, especially when it comes to money. In the modern world, we must defer some instant gratification so we don’t end up living like paupers after our non-working years. Thus, we have investments. (I spell out these facts just in case you wonder why you’re going through all this investment stress.)
Of the 11 sectors of the S&P 500, only three were up—Energy (+64.7%), Utilities (2.2%), and Consumer Staples (0.2%).[i] On the other end of the scale, Real Estate, Technology, Consumer Discretionary, and Communication Services were all down over 25%. Communication services finished last, down 39.8%. In our portfolios, nothing really worked except our energy positions. Even fixed income, which is supposed to be our anchor in the storm, was down over 10%.
To combat our recency bias, because it can go both ways—too confident and too pessimistic–let’s look at some historical facts regarding the S&P 500 index. First, we need to clarify what we are actually investing in since, as shorthand, we often refer to the S&P 500 or the Dow Jones Industrial Average (DJIA) as “the market.” Calling the S&P 500 or the DJIA the market does not do them justice. The S&P 500 is a collection of the 500 largest corporations in the US. From Apple to Zoetis, these are the most prominent companies that have ever roamed the face of the earth. The total market cap is approximately 33.6 trillion dollars.[ii] A number that is difficult even to imagine.
When we invest in an ETF or Mutual Fund that tracks the S&P 500, we’re not just buying the market—we’re buying into the profits (and losses) of the world’s largest and best-run private companies. You must be asking, if these super companies are so well-run, why did I lose money investing in them this year? Well, as investments, the returns they generate will fluctuate. As I wrote in the second paragraph, nothing in the market rides up a straight line.
Now here are some facts about the S&P 500. Since 1965 the S&P 500, with dividends included, has averaged 10.5% per year, for a cumulative return of over 30,000%.[iii] Counting this year, the S&P had 13 years where it lost money. In 57 years, it lost ground 13 times. The worst period was from 2000 to 2002, when it posted three down years in a row for a cumulative drop of 43.1%. But, in the other 44 years, it must have done pretty well, right? Exactly!
Our last negative year was in 2018, when it fell 4.4%. And it looks like 2022 will be down about 19%. Three or four years from now, we will look back at 2022 as the perfect year to buy. The year when the 500 best companies (in the history of civilization) were on sale for a 19% discount. My official prediction for the next ten years in the S&P is? It will fluctuate! But overall, it will probably return to its 57-year average of about 10.5%. Or, in mathematical terms, it will revert to the mean. And reversion to the mean is a happy place when you’re coming off a negative 19%.
So, we will keep plugging away with those automatic investments and our quarterly rebalancing, knowing that averages are averages for a reason; all we need to do is continue to buy when things look the bleakest and sell only when we really, really, really need the money.
Happy New Year to all! Let me know if you want to review your accounts and we’ll get something on the schedule. Thanks for reading, MK
[i] https://am.jpmorgan.com/content/dam/jpm-am-aem/americas/us/en/insights/market-insights/wmr/weekly_market_recap.pdf
[ii] https://www.slickcharts.com/sp500/marketcap As of 12/28/22
[iii] https://www.berkshirehathaway.com/letters/2021ltr.pdf
S&P 500 Total Returns
| Year | Total Return |
| 2022 | -19.33 |
| 2021 | 28.71 |
| 2020 | 18.40 |
| 2019 | 31.49 |
| 2018 | -4.38 |
| 2017 | 21.83 |
| 2016 | 11.96 |
| 2015 | 1.38 |
| 2014 | 13.69 |
| 2013 | 32.39 |
| 2012 | 16.00 |
| 2011 | 2.11 |
| 2010 | 15.06 |
| 2009 | 26.46 |
| 2008 | -37.00 |
| 2007 | 5.49 |
| 2006 | 15.79 |
| 2005 | 4.91 |
| 2004 | 10.88 |
| 2003 | 28.68 |
| 2002 | -22.10 |
| 2001 | -11.89 |
| 2000 | -9.10 |
| 1999 | 21.04 |
| 1998 | 28.58 |
| 1997 | 33.36 |
| 1996 | 22.96 |
| 1995 | 37.58 |
| 1994 | 1.32 |
| 1993 | 10.08 |
| 1992 | 7.62 |
| 1991 | 30.47 |
| 1990 | -3.10 |
| 1989 | 31.69 |
| 1988 | 16.61 |
| 1987 | 5.25 |
| 1986 | 18.67 |
| 1985 | 31.73 |
| 1984 | 6.27 |
| 1983 | 22.56 |
| 1982 | 21.55 |
| 1981 | -4.91 |
| 1980 | 32.42 |
| 1979 | 18.44 |
| 1978 | 6.56 |
| 1977 | -7.18 |
| 1976 | 23.84 |
| 1975 | 37.20 |
| 1974 | -26.47 |
| 1973 | -14.66 |
| 1972 | 18.98 |
| 1971 | 14.31 |
| 1970 | 4.01 |
| 1969 | -8.50 |
| 1968 | 11.06 |
| 1967 | 23.98 |
| 1966 | -10.06 |
| 1965 | 12.45 |
(https://www.slickcharts.com/sp500/returns)
My granddaughter Emily is holding my newest grandson, John. Born 12/13/22. Kelly Knight and Andrew Prymak’s two children.
Getting ready to walk Jessica Knight (my middle child) down the aisle. Jessica and Rob Estes were married 11-12-22.
