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December 16, 2022 | Posted in: Insights

This has been a miserable year for investors with global stocks down 17.4% and a broad U.S. bond index falling 10.9%. The pain has been particularly intense for “balanced” portfolios in that the -14.8% year-to-date return on a 60% stock / 40% bond portfolio indicates that bonds did not provide much of a safe haven. Unfortunately, there may be more to come as the FED has stated that it has a long way to go in raising interest rates enough to curb inflation. Consumer spending seems to be moderating, some measures of business activity are already contracting, and many economists forecast a recession in 2023 with an associated decrease in corporate earnings. So, the outlook remains guarded.

However, there is a silver lining in the sense that higher interest rates and falling stock prices set us up for higher future returns. I won’t go through all of the math, but a reasonable forecast of ten-year annualized returns on a 60/40 portfolio was about 2.25% at the beginning of 2022. Today, the same calculation suggests an annualized return of 5.5% to 7.5% depending upon one’s assumptions. But, in either case, the return outlook is certainly much brighter, and the high end of the range is consistent with longer term returns on balanced portfolios. While it is psychologically difficult, Warren Buffett has pointed out that a bear market is particularly rewarding to those investors who are adding new funds to their portfolios. So, long term investors, don’t despair!