4 Portfolio Lessons From 2022

Key Takeaways:

• Retirees should consider the Bucket strategy to bolt a cash bucket onto one’s long-term portfolio.
• With bonds, mind duration and interest-rate sensitivity.
• Valuation and equity diversification both really matter.
• A couple of lessons from crypto: Refrain from dabbling in a speculative asset, but if you feel that pull to invest in something like this, limit your position to whatever you can afford to lose in your portfolio.

Susan Dziubinski: Hi, I’m Susan Dziubinski for Morningstar. Investors have encountered something like a perfect storm in 2022, with stock and bond markets falling at the same time. Joining me to discuss four key portfolio lessons from a tough year is Christine Benz. She is Morningstar’s director of personal finance and retirement planning.

Good to see you, Christine.

Christine Benz: Hi, Susan. Great to see you.

Dziubinski: It’s been quite a year. And one of your key takeaways from this year relates to the advantages of cash for people who are in retirement. Talk about that.

Benz: Right. You know I’ve long been an evangelist of this Bucket strategy. We originally heard about it from Harold Evensky a long time ago. But the basic idea is that you’re bolting a cash bucket onto your long-term portfolio. Leading up to 2022, I felt like I was always defending the Bucket approach. Now, I feel comfortable saying people should come into retirement with one to two years’ worth of portfolio withdrawals in cash, because we’ve had a year in 2022 where both stocks and bonds have declined simultaneously. Yields have gotten better, but they may not be sufficient to supply retirees’ living expenses. Plus, for my money, I typically would want to be reinvesting in an environment like this year, rather than pulling my income distributions from my holdings. So, there are a lot of reasons to hold cash. But having that buffer, I think, is one of the main ones, and 2022 illustrates that well. One thing I would say, though, in relation to cash is that we had all gotten complacent about our cash holdings, like who cared if something yielded 10 basis points or 25 basis points? Now, we’re starting to see more-meaningful differences. So, definitely shop around for your cash holdings. Don’t just settle for those brokerage sweep account paltry yields because we’re starting to see some significantly better yields come online.

Dziubinski: You mentioned bonds, and bond-fund investors have really seen some shocking losses in 2022. What are some key takeaways about bond funds and bond investing from this year?

Benz: I think one of the main ones is to mind duration, mind the interest-rate sensitivity. If I’m holding bonds through bond funds in my portfolio—and that’s what most of us investors do—I want to be sure to match that duration to my anticipated holding period. So, if I have an intermediate-term bond fund, they’ve had losses of like 13% so far this year. If we look at their durations, they’re like six years or so. So, I want to think about having a time horizon, a holding period for that investment, of certainly over five years. That would be more, sort of, my six- to 10-year bucket. On the other hand, if I have some shorter-term spending needs, some outlays that are going to be happening, perhaps a short-term bond fund could make sense. Their durations are shorter, and losses, of course, have been less so far in 2022. And then, for money that I need really soon, I don’t want to be monkeying with bonds. I want to be holding cash in lieu of bonds. So, I think investors can go a long way by really thinking about time horizon. If they really want to put a fine point on it, individual bonds might make sense. I think we’ve seen the value potentially of holding individual bonds to potentially match them to specific spending horizons. But I do, at the end of the day, really like that all-in-one diversification that you do get through a fund and the simplicity.

Dziubinski: Christine, another lesson or takeaway for investors this year, from your perspective, is this idea of valuation and equity diversification, and that they both really matter. How so?

Benz: They do. In 2022, we’ve had this enormous bifurcation in the market. People may not be paying close attention to this. But value stocks, if we look at like a Vanguard Value Index VIVAX, are about flat for this year, whereas growth stocks, if we look at its counterpart, Vanguard Growth Index VIGRX, are down more than 30% for the year to date. So, I think having that investment style in your portfolio on an ongoing basis obviously matters. People who had glommed onto the high-tech stocks in 2020 and 2021, I think, have learned that lesson very starkly. But just maintaining that style diversification in your portfolio really matters. And to me, this whole experience does illustrate the importance of valuation. I think, as we’ve seen, growth stocks sink, investors have really scrambled for explanations about why that’s happened. And a lot of it’s been pinned on interest rates, that cash flows on these high growth companies are that much further into the future. I’m sure that’s part of it. I think the big thing is just valuation—that you had growth stocks tremendously overvalued coming into this period. It’s only natural that they’ve fallen a lot harder than value.

Dziubinski: Christine, one thing that you and I haven’t talked about very much this year has been crypto. But you definitely think there’s a lesson there for investors in 2022, right?

Benz: I do. And I suppose this is my “I told you so” moment. But during the whole crypto excitement, I was really thinking to myself that this is the definition of a speculative asset in that it doesn’t produce cash flows like precious metals, like gold to some extent, like commodities. And so, that makes it very difficult to actually pin a value on it, to figure out what it should be worth and figure out the right time to buy it and whether it should be included in a portfolio. So, a couple of lessons for me from this experience would be that if you are dabbling in a speculative asset, well, first of all, don’t, because it’s really not an investment, it’s speculation. But second, if you feel that pull to invest in something like this, just limit your position to whatever you can afford to lose in your portfolio and be very, very careful if you are speculating in a period after which that investment has already gone up a whole bunch, which is, unfortunately, what we saw with a lot of people glomming on to crypto after a lot of the easy money had already been made.

Dziubinski: Christine, thanks for your time today recapping some of these lessons from 2022, and thank you for all the time you’ve given to us over the course of the year. Happy holidays to you.

Benz: Happy holidays, Susan. I always love talking to you.

Dziubinski: Thank you. I’m Susan Dziubinski with Morningstar. Thanks for tuning in and happy holidays.