Danger can be defined as “something or someone that may harm you.” My role working with families as a financial advisor is to help them try to avoid dangers involved in our financial world which I believe is interestingly influenced by emotional and psychological factors.

A recent article in the New York Times, “Rookie Traders Are Calling It Quits, And Their Families Are Thrilled” illustrates a danger quite effectively, namely, losing everything; “In early 2022, Mr. Garcia lost everything in his portfolio on a bad options bet, leaving him in a foul mood.” This, despite the fact that Mr. Garcia even watched Youtube videos every night on investing. I make this observation facetiously of course but watching a few Youtube videos and doing some research will not make an expert nor allow someone to predict the future. Unfortunately, many thought it would.

During the pandemic individual traders became emboldened with new apps making it easier to trade and they immersed themselves in social media communities acting as echo chambers for self-support. Much of this behavior persisted in 2022. Some investor sentiment became frothy in 2022 and of course this type of behavior and over exuberance often does not end well. 

Lesson: Many appear to have been living dangerously through their own overconfidence. Likely, many were harmed.

The same article also references Mr. Lahoud whom his mom characterized as extremely intelligent and was quoted as saying “It’s always nice to see him get excited about something.” In this case, it was crypto investments. The article continues, “By early 2022, Mr. Lahoud’s investments started dropping and he faced a massive tax bill from gains he had taken in 2021. Mr. Lahoud gave up trading.”  This is kind of a worst case double-whammy, losing investment value while being faced with a large tax bill.

Lesson: Being intelligent and excited about something does not necessarily ensure success. Making concentrated bets on new ideas and technologies can be a risky strategy.

“Danger” can be replaced by the word “risk”. There’s a time and place to take higher risk whose rewards may or may not come to fruition but most likely not with investment assets that you can’t afford to lose; ie. nest egg investments that exist for your defined personal financial goals and family legacy. My investment philosophy is to focus on sustainable investment strategies that historically have had a high probability of rewarding investors over time relative to the risk they take and, there are investment strategies to accomplish this. 

The hurdle for investors is that the nature of these investment strategies tend to be nuanced and subtle. At first glance, they don’t seem to differ from mass produced strategies or provide as much excitement as the latest ideas espoused by seemingly successful social influencer investors.

So I have to hand it to my clients as initially it’s not always easy to defer to someone else when it comes to investing. One has to listen and pick up on at least some of the subtle nuance that differentiates a fiduciary investment philosophy from agenda driven self-indulgence. If you are able to listen, and act on advice with such fundamental foundations like an investment plan, you’ll likely have a higher probability of success than the other person.

And now for some fun. I was inspired to write on this topic by the referenced New York Times article and was also reminded of an interesting film I watched as a young man when I was exploring artistic film-noir and international intrigue; The Year of Living Dangerously. The film seemed quite risque at the time and stars very young actors Mel Gibson and Sigourney Weaver with a breakout performance by Linda Hunt. And of course there’s an apropos quote from the film to wrap things up neatly.

– Billy Kwan: You might learn something.

– Guy Hamilton: I doubt it. The British don’t let much slip.

– Billy Kwan: Oh, yes they do. They’re just more subtle. You ought to listen harder.”

Happiness, Health, and continued progress in 2023

2022 Q4 Index Review Through December 31

Because this is not only a quarterly review but also an end of year review, I’ve included a bit more data than normal with salient comments above each chart.

• The 4th quarter was interestingly a robust quarter for market returns across the board as can be seen below. Investors would have benefited from a global allocation to their portfolio as the International Developed and Emerging Market indexes outpaced the US Stock market.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]), Global Real Estate (S&P Global REIT Index [net dividends]), US Bond Market (Bloomberg US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2023, all rights reserved. Bloomberg data provided by Bloomberg. 

• All indicated indexes below were down for the year with every index experiencing a decline of greater than 10% with the exception of the Global Bond Market ex U.S. index. 2022 was one of those years where investors lived the idea that one needs to be patient to reap rewards for the risks taken in stocks. In the case below, even a 5 year period is no guarantee of reaping positive returns as can be seen in the 1.4% negative return for emerging markets.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]), Global Real Estate (S&P Global REIT Index [net dividends]), US Bond Market (Bloomberg US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2023, all rights reserved. Bloomberg data provided by Bloomberg.

• For stocks the main story for Q4 is the relative outperformance of value and small companies relative to large and growth. Large value stocks were the best performing asset class at 12.42% with small value coming in next at 8.42%. As a matter of fact this theme was true for the entire year of 2022. Portfolios weighted toward large growth companies would have been weighed down by a negative 29.14% return of the Large Growth Index as shown in the “Period Returns(%)” chart below. Examples of large growth stocks are Apple, Alphabet, Tesla, Microsoft, Nvidia, Home Depot – essentially many of the well-known companies some investors often like  to concentrate in their portfolios.  In summary, a portfolio tilted toward value and small companies likely held up better than one tilted towards large growth companies. 

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Value (Russell 1000 Value Index), Large Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Value (Russell 2000 Value Index), and Small Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Dow Jones US Select REIT Index used as proxy for the US REIT market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2023, all rights reserved. 

• Interestingly, the U.S. bond market performed respectively as a whole for Q4 with positive returns for all indexes with the exception of the Bloomberg U.S. Government Bond Index Long. It’s a different story for the year though with all but one bond index showing negative returns and even Treasury Inflation Protected Securities (TIPS) were a negative 11.85% despite the fact that their proposed use is to protect against inflation. What’s interesting to note for the year is the theme that higher credit quality and lower duration bonds tended to hold up better than others for the year which falls right in line with our bond investment philosophy.

Bloomberg US Treasury and US Corporate Bond Indices
Bloomberg Municipal Bond Index

One basis point (bps) equals 0.01% . Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds, and the Yield to Worst are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofA US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofA Corporates, BBB-A rated. Bloomberg data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) YearbookTM, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2023 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2023 ICE Data Indices, LLC. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bloomberg data provided by Bloomberg.

• I’ve provided global bond data for the year because it illustrates the potential benefits of a bond portfolio that is not just invested in the U.S. but is globally diversified. In the “Changes In Yields(BPS) Since 09/30/2022” chart you can see that there is a wide dispersion of yield changes across countries with the US increasing 41 bps and the UK decreasing by 63.7 bps. Allowing your bond managers to look for bond opportunities in other countries as opposed to just the U.S. may benefit portfolio characteristics.

One basis point (bps) equals 0.01% . Source: ICE BofA government yield. ICE BofA index data © 2023 ICE Data Indices, LLC. 

Morgan is an investment advisor in San Diego, Calif. He is registered with the Securities and Exchange Commission (SEC). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the commission. Morgan only transacts business in states in which he is properly registered or is excluded or exempted from registration. A copy of Morgan’s current written disclosure brochure filed with the SEC, which discusses among other things, Morgan’s business practices, services, and fees, is available through the SEC’s website at www.adviserinfo.sec.gov.

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