Brad’s Note: How did your portfolio do in 2022? If it wasn’t great, you’re not alone. Last year was the first time in U.S. market history both bonds and stocks fell double digits.
The S&P 500 fell 18%, bonds fell 14%, and a 60/40 retirement portfolio fell 16%.
But some investors did relatively better. Over the holidays, we heard from three readers whose portfolios posted 66-95% smaller losses than the averages noted above:
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-6%
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-5%
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-1%
Today, I’m going to turn things over to Wide Moat Research analyst Adam Galas. He’ll share two bedrock lessons that allowed our readers to avoid much of the damage other investors suffered last year.
These are lessons that can help you avoid a potential disaster in 2023. They can set you up to enjoy a rally many are predicting later in 2023. Plus, they can help you survive – and even enjoy – future bear markets.
It’s September 2008, and the S&P fell 9%. Then it fell 17% more in October. The economy is on fire, and the financial system in tatters.
By December, Altria (MO), the best-performing stock in U.S. history, is yielding a mouth-watering 15%. A yield so high, it’s offering long-term returns on par with the greatest investors in history on dividends alone.
But the market is in free fall… Is Altria’s 15% yield safe or what we call a “sucker yield”?
Considering it’s protected by growing revenue, earnings, an investment-grade balance sheet, and a 39-year dividend growth streak (in 2008)… Altria’s yield was the real deal.
But obviously, Altria is going to keep falling, right? In the worst economic collapse since the Great Depression, how can it not? Surely, it’s better to wait for the stock to fall more and then buy it at an even better yield.
Altria bottomed in early December 2008. And by the time the S&P bottomed on March 9, 2009, Altria was up 9%. That’s still a great yield and value, but the point is that the “obvious call” to not buy a safe 15% yield and 20% long-term return potential was dead wrong.
I’m not saying it was obvious that Altria would bottom at a 15% very safe yield in December 2008. I’m saying individual companies don’t bottom when the market stocks stop falling or the bad news stops coming. They bottom when all the bad news and potentially bad news are priced in.
No one rings a bell at the top or the bottom. Not for individual blue-chips, and not for the market as a whole.
The first lesson to learn is if you insist on only buying only the very bottoms, you will rarely buy any stocks.
Wall Street Will Always Surprise You
Picture another scenario… It’s 2020, and the world’s economy is locking down for the first time in history.
The COVID-19 virus is rampaging across the globe. 20 million Americans lose their jobs in two months. That’s 2.5X more job losses than the entire Great Recession, which lasted almost two years.
In Q2 2020, the US economy contracts at a 32% annual rate. That’s the worst economic collapse in American history.
Knowing all this, what kind of stock returns would you have guessed for 2020? -50%? -66%? -75%?
The stock market finished 2020 up 18%. The worst economic collapse in history was followed by 33% growth in Q3 when the economy started reopening and consumers began spending stimulus checks.
But wouldn’t all that stimulus lead to inflation? Indeed, in 2021, inflation began to rise… and rise… and rise.
Bond yields began to soar, tripling off their record lows. After a decade of free money and rates at near zero, how would the stock market react to soaring inflation and a tripling of interest rates in 2021?
Obviously, the 2020 Pandemic rally was a freakish bubble and the market was set to crash in 2021, right? Wrong.
The stock market rose 29% in 2021.
Here’s the lesson this teaches us…
According to author and director of research at Pension Partners Charlie Bilello, except for the Great Depression, buying and holding U.S. blue-chip stocks would have delivered better returns than perfect economic timing.
11.7% annual returns since 1928 compared to 10.6% annual returns with perfect economic timing.
So even if you could predict world-changing events, you still can’t predict what stocks or other asset prices will do in reaction to them.
Risk Management, Not Risk Avoidance, Is How You Get and Stay Rich
Risk can’t be avoided, just managed.
And the best way to manage risk and avoid disaster is by following the advice we constantly preach at Wide Moat: by diversifying your portfolio.
Not just by stocks but across asset classes like bonds, managed futures, and even blue-chip ETFs.
For example, bonds have gone up in 92% of bear markets since WWII. So it makes sense to have them in your portfolio for future potential bear market scenarios.
Combining individual blue-chips with other assets is how we helped subscribers build portfolios that outperform the broad markets.
Portfolios that deliver safe 3% to 6% yield, 10% to 15% long-term returns, and fall 40% to 66% less than the S&P in even the most extreme market crashes.
If you can’t stomach the market’s unpredictable but inevitable volatility, then even the best stock picks in history won’t help you retire rich.
But if you focus on safety and quality first, prudent valuation, and sound risk management… Then, my friend, you can laugh at or even enjoy bear markets.
All while sleeping well at night, no matter what the economy or stock market does.
Safe investing,
Adam Galas
Analyst, Intelligent Income Daily
P.S. We’re currently putting together an exciting new portfolio to share with readers, designed to weather the economic conditions we foresee for 2023.
In the meantime, the best way to safeguard your portfolio is by boosting your income streams. Check out the Intelligent Income Investor to help you get started with some of the best blue-chip dividend companies on the planet.