5 Portfolio Lessons From 2023

Key Takeaways

1. We knew that you shouldn’t fight the Fed with respect to your bond portfolio, but we also discovered that stock portfolios were very much directed by sentiment over what the Fed’s next actions might be.
2. You can pick up yields as high as 5% on your cash instruments today, so don’t settle for whatever your bank is defaulting you into.
3. Hold some liquid reserves if you are in retirement and actively drawing upon your portfolio.
4. Patience is always a virtue. But we really saw patience vindicated for investors who kept the faith in large-cap growth and technology stocks in 2022. Those were some of the hardest-hit categories.
5. Morningstar’s Amy Arnott looked at value and growth portfolios to see whether investors can get any sort of premium by periodically rebalancing between the two. She found that, given the amount of work involved in that endeavor, just owning the broad market is probably a better use of investors’ energies.

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. Despite a lot of worry about inflation and the possibility of a recession, 2023 turned out to be a pretty good year for most investors. Joining me to share a handful of key portfolio lessons from 2023 is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning.

Good to see you, Christine.

Christine Benz: Good to see you, Susan.

Dziubinski: Happy holidays.

Benz: Same to you.

Lesson 1: Don’t Fight the Fed

Dziubinski: Thank you. One lesson you think that 2023 bears out is that old adage, “Don’t fight the Fed”—or any central bank for that matter. What does that mean for investors?

Benz: Right. We really saw the Fed very much directing the stock and bond markets activity in 2023, where bonds, of course, continued to get crunched for a good part of the year. Investors in long-term bonds still are in negative territory over the past year. And so, we knew that you shouldn’t fight the Fed with respect to your bond portfolio, but we also saw the stock portfolio very much directed by sentiment over what the Fed’s next actions might be. So, we saw stocks rally early in the year, struggle in the middle part of the year, then come back again when it became clear that the Fed’s actions, at least not yet, won’t push the economy into a recession. So, I think it’s important as much as we tell investors to tune out short-term macro news, it is important to keep in mind the direction of interest rates. We just saw how impactful they can be in terms of the major asset classes in 2023.

Lesson 2: Don’t Settle for Low Yields

Dziubinski: On a somewhat related note, you say that another takeaway from 2023 is not settling for low yields.

Benz: Absolutely. We have much higher yields on offer today, and I think we had all gotten a little bit complacent in that era where yields were sub-50 basis points.

Dziubinski: It really didn’t matter.

Benz: It didn’t matter. It didn’t feel like it was a good use of time to shop around for the best yields, certainly on cash instruments. Well, now we’re in an era where there is a broad disparity in the interest rates that are on offer. You can pick up yields as high as 5% on your cash instruments today. So don’t just settle for whatever your bank is defaulting you into, or if you’re using a brokerage sweep account to live side by side with your investment accounts. Don’t just hunker down there because chances are you are settling for a lower yield than you need to. Do a little bit of shopping around. The default that you may have at your financial institutions probably isn’t your friend, unfortunately. Do your due diligence, do some homework. It really is worth your while to make sure that your cash accounts are working for you.

Lesson 3: Hold Some Liquid Reserves

Dziubinski: Speaking of cash, you think another lesson here is that holding some liquid reserves is especially important for retirees. And you think that it doesn’t actually make sense for retirees to hold a fully invested portfolio. Tell us about that.

Benz: Right. You know I’m a big enthusiast of this bucket strategy idea where you’re holding some liquid reserves if you’re someone who is in retirement where you’re actively drawing upon your portfolio. And 2022 was really the perfect illustration because we had a year when both stocks and bonds fell at the same time. That doesn’t happen a lot. But you would rather leave them undisturbed, right, to recover a little bit. You would rather not be pulling from assets that have diminished in value. 2023 was a little bit of the same where we saw bonds were not great for a good part of the year. We saw stocks being volatile. It would be a year where you would probably rather pull from your liquid reserves again in 2023. So, you don’t want to overdo the cash, especially given we know now how inflation can take a bite out of your cash yields. But I do think that retirees who want to have peace of mind and an easy source of funds in good markets and bad should think about holding some liquid reserves on an ongoing basis.

Lesson 4: Patience Is a Virtue in Investing

Dziubinski: You think another key lesson from 2023 is the idea of patience being a virtue. What do you mean by that?

Benz: Patience is always a virtue. But we really saw patience vindicated for investors who kept the faith in large-cap growth and technology stocks in 2022. Those were some of the hardest-hit categories. While they kind of went from worst to first from 2022 to 2023, more patience is warranted, I think, for other parts of your portfolio. We’ve seen value stocks, small-cap stocks, non-U.S. stocks all dramatically underperform the total U.S. market. But I do think that investors should continue to exercise patience in those areas. You want a well-diversified portfolio. You never quite know when those categories will recover. But I believe they will have their moment in the sun. It’s just kind of cyclical that way.

Lesson 5: Don’t Try to Strike Just Because It’s ‘Hot’

Dziubinski: Your final lesson is that you don’t have to necessarily make narrow bets in the market as an investor to take part in whatever is “hot” at the time. What do you mean by that?

Benz: Right. I just mentioned that large-cap growth and technology stocks really paced the market so far this year. But the good news is if you own VTSAX, the [Vanguard] Total Stock Market Index, or some variation of it, well, you’ve really participated in the gains of those same securities. In fact, those same securities are taking up a big share of that portfolio at this point in time. Our colleague Amy Arnott did some great research where she looked at the value/growth portfolios sitting side by side and looked at whether there’s any sort of rebalancing premium that you can get by periodically rebalancing between the two. She found that, you know, given the amount of work involved in that endeavor, just owning the broad market is probably a better use of investors’ energies.

Dziubinski: Well, Christine, this is the last video the two of us will be airing in 2023. So, I just want to thank you for always being accessible, thoughtful, and for sharing your wisdom both in your columns on dot-com, in your podcast, and in your videos with me. We appreciate it.

Benz: Thank you so much, Susan. Thanks for all you do.

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

Watch “Ed Slott: Roth Conversions Especially Attractive Before 2026″ for more from Christine Benz.