It is hard to believe it is already December. We are all ready to put 2022 behind us. It is time to look ahead to next year. We are all hoping for better things. But there is one major concern on our minds. What if stocks go down again in 2023? We look at the potential impact of back-to-back down years of negative investment returns.
Watch Video: What if Stocks Go Down Again in 2023?
- 0:00 - Intro
- 0:20 - Welcome
- 0:30 - Looking back at 2022, so far.
- 0:52 - What if 2023 is also a bad year for your investments?
- 2:41 - The math of negative returns and income distributions
- 4:12 - Income distributions amplify the impact of negative returns
- 5:10 The psychological impact of down years
- 6:45 - 3 Things you can do to prepare for a second bad year
- 8:20 - What we are hearing from our clients
- 10:39 - Planning for when things go poorly
- 11:55 - Final Thoughts
- 13:33 - Outro
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2022 - A Uniquely Awful Investment Year
Most common asset classes have had a difficult year in 2022. Stocks and bonds are both down double digits.
But this year is unique. It is the first time in more than four decades that stocks and bonds have decreased in the same year.
Asking the Big "What If" question
Back-to-back down years in the stock market is not common. The last time we experienced this was from 2000-2002. Prior to that, it was in the early 1970s.
This isn't a prediction for what may happen in 2023. But there are some headwinds that may make it difficult for the stock market to post a positive year.
The Problem: Taking Income Amplifies The Declines
This is of particular concern for retirees depending on their savings and investments to create income in retirement. The income taken from those accounts can amplify the impact of the negative market returns. Here's an example.
In the example above, the compounded investment return is -23%. But the total reduction in principal, or drawdown, is more than 30%. This makes it more challenging to recover from the decreases.
3 Things Retirees Can Do to Reduce the Strain On Your Investments.
Nobody likes to tighten their belt...
But it may be necessary. Even when you were working, it was necessary to cut back when things got difficult. You may need to review how you are spending money and look for ways to reduce your expenses.
Eventually, stocks will recover...
And it is possible, the share of great businesses will recover their losses quickly. Don't be too quick to reduce your allocation to stocks. It may hamper your ability to claw your way back to where you were.
It may not be as bad as you think...
The downturn is frustrating for all of us. But the impact of 2023, may not be as impactful on your long-term plans as you think. You may not need to do anything, or you may need to make major changes, but until you look at the overall impact on your overall situation, it is hard to know just what to do. (We can help you with that!)
Most Investments Recover, Many Investors Do Not...
This is an important distinction. Investments will eventually recover from their price decreases, set new highs, and create new wealth. Investors will have a more difficult time. Successful investing is hard. Adversity makes it difficult for people to stick to their long-term goals and not make mistakes.
It isn't the magnitude of the drop that creates the most concern. The great recession was the most severe drop in the stock market since the Depression. A 57% price drop is not an enjoyable experience. But it was not nearly as challenging as what we experienced at the turn of the century.
The Dot Com Bust saw stock prices drop in 2000, 2001, 2002, and early 2003. The magnitude wasn't as bad, down less than 50%, but it lasted almost twice as long. This placed enormous stress on client accounts. It also placed enormous stress on the confidence and resolve of investors who had to fight through it.
This bear market doesn't compare to those two...yet.
"Are We Going to Be Ok?"
The adversity we are facing creates a lot of concerns about the future. Many people wonder if something like this will cause them to run out of money or delay their retirement. There is only one way to find out.
One of the best tools we have found to relieve stress is to review your overall plan. Planning looks at the longer-term impacts of things like 2023. It can also "stress test" the plan for a variety of other potential issues you might face. If this is something you would like to discuss with an advisor, we will be happy to review your plan with you. And if you haven't gone through the planning process before, we welcome the opportunity.
Here's an easy way to connect with a financial advisor near you. Fill out the form below and we will contact you.
Appearing in this video...
Todd, Mike, and Neal are the three most experienced advisors on our team. Combined they have more than 90 years of experience in working with clients and helping them navigate through both good times and bad.
Todd Kimpel, CLU®, ChFC®
Todd began his career as a financial advisor in 1982. He is in our Wheeling Office.
Michael Seese, CFP®
Mike became a financial planner in 1996. He is located in our Parkersburg Office.
Neal Watson, CFP®
Neal start his career as a financial planner in 1996. He is located in our Marietta, Office.