2023 Investing: Larry's Perspective

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Greetings to subscribers, both new and seasoned. As we begin a new year, there is some good news for investors. But let's deal with last year first.

2022 was a rough ride for stock investors. After two very strong years, all major markets fell amidst steep interest rate increases and recession worries. To add insult to injury, inflation (Wealth Killer #3) has significantly reduced our purchasing power.

Annual Returns 2022 2021  
S&P500 -18.11% 28.70%  
Nasdaq -33.10% 21.39%  
TSX Comp -5.84% 25.09%  
x- North American -10.58% 9.57%  
Emerging Markets -12.82% 0.08%  
Led by tech, almost all stock sectors were lower. The only major exception was the energy sector which was up 50%+. The relative absence of tech stocks and a heavy energy weighting resulted in a much less painful year for Canadian stock indexes versus US stock indexes.

To make matters worse for investors, driven by higher interest rates and inflation, 2022 was an exceptionally bad year for bonds.
Annual Returns 2022 2021
All Bonds -11.88% -2.85%
Long Term Bonds -21.68% -5.12%
Short Term Bonds -3.97% -1.05%
(as per VAB, VLB and VSB ETFs)    
Overall, Canadian bonds were down almost 12%. Long term bonds got crushed with a 21.68% loss while short term bonds were off around 4% (as I mentioned in my 2022 new year's note, shorter term bonds are not negatively impacted as much as medium and longer term bonds when interest rates rise).

This 2022 double whammy of both stock and bond losses resulted in very poor returns for most investors with balanced portfolios.
Vanguard All-in-one ETF Returns 2022 2021
VEQT (100% stocks)   -10.78% 19.66%
VGRO (80% stocks)   -11.19% 14.97%
VBAL (60% stocks)   -11.37% 10.29%
VCNS (40% stocks)   -11.70% 5.80%
VCIP (20% stocks)   -12.09% 1.46%

Because bonds performed so poorly there was no place to hide among these types of balanced funds. In fact, the higher the bond allocation, the greater the loss!

One stock market category that managed to achieve flat to small positive returns (and beat the overall market by a mile) was the "dividend ETF" class which I have highlighted the past couple of years:
Dividend ETF Returns 2022 2021
VDY -0.21% 36.82%
XEI 0.40% 35.87%
ZDV 1.76% 28.76%
VGG -4.02% 22.23%
ZDY 1.78% 23.12%
VIDY 1.63% 14.30%
ZDI 1.78% 23.12%
Now for some good news:
  1. Stocks are cheaper! You can buy great businesses (and ETFs that hold great businesses) at lower prices. If you have a long investment time frame and are growing your stock portfolio, the current market downturn definitely works in you favour. If you have a long investment time frame and stable stock portfolio, the market downturn can be unnerving but likely won't mean much in the long run. (On the other hand, if you are currently drawing on your stock portfolio to cover ongoing living expenses, there is no getting around it ….. the downturn hurts.)
  2. For the first time in 15 years, investment grade bond and GIC interest rates are in the range of 4%-5%. No, bonds and GICs rates don't beat the current inflation rate, but if the Bank of Canada is successful, that should change.

Recommendations for 2023
As you know, I believe in: (i) long term ownership of great businesses by holding stocks directly or through low cost index ETFs and (ii) maintaining an asset mix that matches your risk tolerance, time frame, objectives, etc. (see Chapter 9 for a refresher on asset mix). This simple, perhaps boring, but very powerful investment philosophy does not change with market ups and downs.
I do not know your individual circumstances so these are not personal recommendations.
I continue to like the type of dividend focused ETFs mentioned above. They tend to hold well established, profitable companies which are less volatile than the broader stock market. For investors with larger amounts to invest, building a portfolio of individual dividend stocks can be a good strategy.
In the fixed income portion of portfolios, I prefer less volatile, shorter term bond ETFs and well as GICs.
The 2022 performance of balanced all-in-one ETFs from Vanguard, RBC iShares, BMO and others was disappointing. As both stocks and bonds fell sharply, there was no safety in "balance". But these ETFs now hold much cheaper stocks and much higher yielding bonds. And they are simple, low to no maintenance and very low cost. I can't predict where markets will go this year but I believe these ETFs remain good choices for long term investors.
As I said a couple of months ago, here are a few things to remember:
  • Market downturns are no fun but they are normal
  • Riding the sometimes very unpleasant stock market rollercoaster is the price we must pay to earn good long-term returns
  • The media loves doom and gloom headlines but no one can predict the market in the short term
  • Current stock and bond prices already reflect to a significant degree the probability of recession
  • Studies show that average investors underperform the market by 4% to 5% annually for three reasons: (i) paying high fees, (ii) selling when prices are low and, (iii) buying back in when markets are high......over time that level of underperformance is crippling
  • As an investor in blue chip stocks or broad market ETFs, the vast majority of businesses you own continue to produce healthy profits today, will very likely remain profitable through the next recession (whenever it comes) and will very likely achieve record profits in the years to come

Investor Abuse

As I said in the book, most advisors are good people. It is just that way too many of them are only able to sell crappy, expensive, underperforming products. But there are still too many examples of systemic abuse among groups of advisors as illustrated by this disturbing case against Scotiabank. It is worth a quick read.

Thank You

A special thanks to all of you who recommend my book to others. Because of you, thousands more Canadians are learning to Beat the Bank! Please consider forwarding this email to family and friends. It may spark an interesting conversation.

If you have any questions or comments, just email me at larry@larrybates.ca.
Keep an eye out for info on another Live Q&A Webinar I plan to host in February.

All the best!

Investment Advice for Affluent Canadians
Some investors prefer ongoing advice. I offer full-service, ongoing investment advice and financial planning for clients with portfolios of $1 million+. My clients benefit from greatly reduced fees and portfolios which are tailored to match their personal objectives, time frame and risk tolerance. If my service might be of interest to you, just reply to this email and we can set up a call to discuss.

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