The Benefits of a Bad Year: 2022 in Review

Now that 2022 is safely behind us, I think most investors share the same feeling about it: “good riddance.” Unfortunately, there does not seem to be much optimism about the new year either, with the prospect of recession still looming over everyone’s heads.

This is a little irrational, however. While 2022 did not meet all the criteria for a recession, it was a major doozy in other ways – and we are still standing. Granted, things can always get worse; but I think some cautious optimism for 2023 is nonetheless in order.

Why 2022 was a bad year

Just how bad was 2022? Well, for the average 60/40 retirement portfolio, it turns out to be the third-worst ever, onlybested (or… worsted?) by a couple of years during the Great Depression.

If that comes as a surprise, remember: the “40” in a 60/40 portfolio consists of bonds. And while 2022 was rough for stocks, it wreaked havoc on bonds:

This is especially bad news because bonds are often used as the bedrock of retirement portfolios, delivering steady income and at least modest returns through thick and thin. A bad year for the stock market may make headlines, but a bad year for the bond market will really hurt everyday investors.

In both cases, however, the short-term pain can make for long-term benefits. This is where we find some cause for optimism.

How 2023 could be better

I think there are at least three pieces of good news in the current landscape that many investors could use to their advantage:

  1. Slumping stock prices offer an easy entry point into the market. If you have the resources to spare, now may be the time to ferret out and snap up the undervalued assets that will gain value once things turn around (just remember that “cheap” does not automatically mean undervalued).  
  2. Low bond prices make for high bond yields. We covered this counterintuitive but crucial benefit of bonds (along with others) on our blog earlier this year, so in brief: now may be the time to take advantage of discounts in the bond market as well.
  3. Bad years are often followed by long-term returns. In his analysis of the 10 worst years in stock market history, Ben Carlson notes that in every single case, the market rebounded to achieve positive returns – often major ones – within five years. A very good reason to hold your course even when things look scary, as I have said many times.

Time to come out swinging

One more fun fact: technically, the US economy already entered a recession in 2022, at least if you define a recession by GDP. A bit of a facetious point, as that definition is widely considered inaccurate; but it serves to illustrate further just how rough last year really was.

And you survived! That is worth something.

Remember, “that which does not kill you makes you stronger.” Or at least it can, if you come out the other side with a willingness to learn and a proactive rather than reactive attitude. It is just as true in money as in life, and just as important to remember now as it has ever been.