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Who is The Biggest Loser?
If you are a reality TV show fan, don’t worry, this article is not about weight loss. Rather it is about, you guessed it, investing. I’ve been ruminating on this thought for a bit and figured it was time to unleash it. So, I’ve been thinking about 2022 stock and bond market returns quite a bit. I find that as a financial coach, it is important to me to really reflect on the past so I can better my advice in the future. I’ve written quite a bit about 2022 markets, but figured I’d give one more lesson on something I simply haven’t been able to shake.
The question at hand is in a year where the stock market (S&P 500) was down approx. -19.64%, and the Bond market (Barclay’s Agg) -13.06% who was the Biggest Loser? It is an interesting concept as you may be saying those who were heavily invested in tech, as the NASDAQ was down -33.47%. That would be a good guess, however, it is not where I am going with this investing lesson.
The investors who came out the biggest losers in 2022 weren’t investing in the technology sector. As a matter of fact, the investors who came out by far the biggest losers in 2022 were ironically the most conservative!
Now, you must be thinking “Andrew I know the bond index had its worst year, down -13.06%, but how is that worse than down -33%?”
I’m so glad you asked and took the proverbial bate. You see the investors who faired the worst last year were the most conservative of investors. Even more so than the all-bond investors who lost -13%. They were those that couldn’t stand losing another dollar and guess what happened? That is right – they went to cash to wait out the rockiness of the markets.
Let me further explain, shall I? You see albeit that perhaps they mitigated some of the downturn and maybe only lost 20% in the markets or 10% in bonds, these folks made some critical decisions. First, they would have been the only ones that actually realized a loss. Much like any investment, you only realize a loss when you sell. Think of your home for instance. It isn’t valued regularly and probably peaked in value last year sometime. Although prices have come down, no one views it as a loss. Why? Simple, because you are still living in the house, enjoy all its value, and most importantly haven’t sold said home. The same concept rings true in investing. One negative year is just that unless you do something drastic and sell it all to realize a loss.
Secondly, those that are sitting in cash earning hopefully 4% on their money ever since have failed to realize the rebound of 2023. As the markets are back up double digits, those that went to cash are meandering along at an inflationary pace. These individuals, in the best cash market in years, are in a terrible position. They, for starters, can’t jump back into the markets, can they? That would mean admitting defeat and getting back in after already seeing markets rebound more than half the losses. So now what? Sit in cash until the next “correction”? Invest it all back in when the markets are “calm” and likely at new all-time highs?
You see none of these strategies lead to the best outcome and rather all of them likely lead to that investor claiming the biggest loser of 2022 award. I know that sounds harsh, and I apologize, however, the facts are just that. I’ve been at this game for a long time now, and time and time again the people who fare the worst in the markets are those who get emotional and try to time the markets by making huge irrational decisions.
Thus, by being really conservative and cautious with the markets, what I found was those that actually acted on their conservative emotions ended up being the most hurt by the downturn in 2022. It is an oxymoronic notion, but one that speaks to fortune favoring the bold. Those who invest in the markets must ride the ups and downs to reap the rewards they give. Hope you all enjoyed my biggest loser blog and wish everyone wealth, health, and happiness.