• Returns in 2023 will be as misleading as any other year
  • A calendar year is as arbitrary as any other cherry-picked period
  • We all face different rates of tax, inflation and fees

With 2023 in the bag for investors, the financial media will be falling over itself to report the annual results of the typical portfolio. But real people with real portfolios should beware of such analysis, as I warned about this time last year…

Yes, it really was the worst year ever for investors… sort of

[This article was first published on 9 January 2023.]

The statisticians and newspaper headline writers are falling over each other with claims of just how bad 2022 really was for investors.

Online magazine Money has, “The worst year since 2008”. FactSet data reckons it was the seventh worst year for the S&P 500 index since 1929. Cryptocurrency website Cointelegraph calculated it was the “Worst year for US stocks and bonds since 1932”. And so on and so forth…

My personal favourite, from Forbes, is a real cracker: “If 2022 Seemed Like The Worst Year Since 536 A.D., You’re Not Alone”.

Now you might’ve noticed that nobody can quite agree whether it was the second, third, fourth, fifth or seventh worst year for investors. Stock market statisticians are as bad as epidemiologists in that sense.

But out of all the analysis, nobody went right out there and made the big claim. Luckily, you have me to do it for you: it was the worst year ever for investors.

Yes, ever.

Here’s the cherry-picking filter I’ve used to get to my own preferred conclusion…

First of all, I’m using data that goes back to the 1930s. Financial markets just aren’t comparable going back much further. There were of course panics before that. But they didn’t have the same impact on a nation of investors. The era of investment manias that captured the wider population began with the booms and crashes of the last century.

Second, I’m focusing on American investors’ experience of investing in US markets. Why? Because that’s the only statistic by which the year really was such a record-breaking debacle.

UK-based investors in the US market might notice that their assets didn’t go down nearly as much as the media dramatised. The difference was the explained by the exchange rate. The US dollar surged, so UK investors’ currency gains offset some of the losses in the US markets themselves.

You could even say that US stocks and bonds didn’t really crash particularly horrifically in 2022. Instead, it was the US dollar that surged. That pushed down US prices.

Think of it like this: if the definition of a centimetre changed from 10 millimetres to 11 or 12, then the size of everything would suddenly be a lot smaller… to the extent that we use centimetres to measure it.

In much the same way, the US dollar, which is the global measuring stick for prices, surged almost 20% to September, but then corrected back down so that it only finished the year up about 10%. This change caused chaos in US dollar prices because the unit of measurement changed. It was suddenly worth more.

UK investors looking at their pound sterling-denominated investments in the United States likely didn’t notice much shift. That’s because the rising US dollar offset their losses in terms of pounds.

US investors were not so lucky. They weren’t protected by the US dollar’s surge in foreign exchange markets. And so, they bore the full brunt of falling asset prices instead.

Indeed, that’s the second filter I’m using to reach my conclusion that it was the worst year ever for investors – US assets as measured for US investors.

The third filter for my “the worst year ever” claim is that I’m focusing on a 60/40 portfolio – the cookie of the cookie-cutting financial advice industry. This model portfolio, espoused by assets-under-management-compensated professionals, is a 60% allocation to stocks and 40% to bonds.

The idea is that, when risky stocks have a bad year, safe bonds will go up instead. Thus, an allocation to bonds and stocks combined adds stability to the overall portfolio, but still offers good returns (for those collecting the fees anyway).

As you age, you’re supposed to add more bonds to make the portfolio even safer. Except, of course, that 2022 was the year in which bonds proved to be not safe at all. And, worst of all, this came to light in a year when stocks plunged too.

While US stocks plunged 19% in 2022, US government bonds were down about 15%, depending on which ones you use to measure.

This is an extremely rare combination. In fact, the whole premise of the 60/40 portfolio is that this combination won’t happen. Stocks and bonds are supposed to be negatively correlated. Bonds are supposed to save you from bad years in the stock market and vice versa.

And US bonds had an especially bad 2022. The only other time in the last century when US government bonds fell by double digits was 2009: this was when the stock market began an epic recovery, offsetting those bond losses as they’re supposed to.

Most of the other times when the 60/40 portfolio performed poorly were years when stocks crashed so badly that mediocre returns in the bond market couldn’t offset the losses. Those in fear of a stock market crash could’ve held more bonds to protect themselves more. But 2022 was very unusual in that both stocks and bonds fell, dramatically worsening the overall performance of a 60/40 portfolio.

So, that’s filter three – the 60/40 portfolio and its unusual failure in 2022. A failure which comes in at a return of -17% for the year for Americans investing in US assets.

Filter four is an especially awkward one. It’s the calendar year.

You see, 2022’s plunges in US assets coincided quite – actually, very – nicely with the calendar year. This makes things very convenient if I’m trying to claim that it was the worst year ever, right?

Other crashes might’ve started in late 2007 and have finished in 2009, splitting the chaos into three separate years, dramatically reducing how bad the crash looks if you compare the calendar years separately.

A 2022 type of crash that begins in July and ends in June might not even register on the list of record breakers as measured by calendar years. That is because it’d be split in half.

But 2022’s crashes timed things nicely for my purposes today. The peak was in the final days of 2021 and the Santa rally of 2022 faded, even if we didn’t finish on the lows of 2022.

Compare the performance of an American’s 60/40 portfolio during other 12-month periods and you might come up with completely different conclusions to the one I reach today…

Even then, 12 months is arbitrary too…

As you can tell by now, advertising the good or bad performance of investment assets is surprisingly easy… It all depends on what filters you pick and choose.

But it’s adding in inflation which everyone else seems to have missed. And my fifth filter is what makes things especially miserable… for US investors… who bought into a 60/40 portfolio… in January 2022 and sold it all in December 2022…

Using all the same constraints I have, except inflation, the website A Wealth of Common Sense calculated that the drop in stocks and bonds was the third worst year for a 60/40 portfolio since the 1920s. First and second place go to the Great Depression’s 27% and 20%. To this, we compare our 60/40 portfolio’s performance of -17%.

Not quite as bad, but still in third place, right?

But wait, what about the 7% inflation Americans experienced in 2022? That’d make their real return -24%. Still only in second place? Not once you adjust for deflation during the Great Depression…

According to the Minneapolis Federal Reserve, US inflation in 1931 was -8.9%.

No doubt this sounds apocalyptic… if you have an education in economics and your spouse does the shopping. For the rest of us, falling prices are quite good. They left US 60/40 investors with an 18% loss in real terms in 1931, for example.

Which is a lot less dramatic than the inflation-adjusted 24% losses of 2022.

There are, of course, other ways to fudge the analysis and come up with “the worst year ever” conclusion. For example, because financial markets are now so big, the same percentage loss today is a loss of wealth far greater than in the past. And because participation in financial markets is much higher (directly or indirectly) than in the past, the losses impact far more of us.

So, if you dice the statistics just right, yes, 2022 really was the worst year ever for investors. US investors holding a 60/40 portfolio for the calendar year, that is.

But that’s hardly my point is it? My point is that such figures likely reflect the bias of the person using them more than the experienced reality of… you.

And that’s inherently so. There is no way to present entirely accurate or relevant figures. We must use arbitrary ones because everyone’s lived experience of the financial markets in 2022 was different.

But please do remember to keep the nature of the exercise in mind. The assumptions might be determining the conclusions.

Until next time,


Nick Hubble
Editor, Fortune & Freedom