All stock indexes will finish this year in the red. The Dow Jones Industrial Average will be down in the neighborhood of 15%, the S&P 500 following along and the NASDAQ is certain to finish down in the neighborhood of 30%. Ouch! One of the best pieces of wisdom I heard early this year came from an interview on Fox Business, where a female strategist in passing said, “markets always climb the stairs up, but they’ll take the elevator down”. I thought to myself – boy, is she right about that! And so it was for 2022.

What can you do about it? That’s why I’m writing here, as you may be surprised to find that you can do something [about it]. I have a homework assignment for you, please take a discerning look inside your own portfolios. I know most of you don’t even want to open up your statements, right? No doubt it’s been ugly, especially for those who owned Tech stocks and even bonds at the beginning of this year. The carnage was no doubt massive; not much in the category of financial assets were left unscathed; there has been nowhere to hide really for most of the year, other than in cash. I gradually sold positions over time and eventually went completely into cash by the end of April, and I’ll still end up down around $35-$40k! I can’t remember a time when I ever went completely into cash, but the situation looked that dire to me for a variety of reasons – from the people running the country to the trash running many of the boardrooms across the country, it was a year where Democrats and all kinds of Woke incompetents were placed in important positions having their way with our economy, and it got real ugly for most Americans. Needless to say, 2022 will go down as a most forgettable year [from a financial asset standpoint].

Returning on subject, a new year is just around the corner and what I would like for you to do is when you meet with your financial advisor to review your portfolio, even if you’re a do-it-yourselfer, I want you to complete an exercise. This will help you greatly going forward. I still need to remind myself of my own rules, especially in a world where everything [financial] no longer just goes up or sticks to the wall. Not at all, we’re in a world now we haven’t seen the likes of since the late 1970’s in this country. I wasn’t even advising clients on portfolios yet when we last had runaway inflation but I did live through it with all the ups and downs of trying to find a steady and stable income stream back then as a young lad, and that alone was a huge challenge for me and will be for many.

Do this – look at every position you own in your portfolio, go line by line, entry by entry asking yourself each time, “Now why do I own this?” That’s not an intruding question or a rude question to ask someone who is advising you on your portfolio in this challenging environment. “Why do I own this”? is a great question that is going to lead you to the promised land [if you keep asking it]. I promise you, you will get really good at defending those positions you actually should own at any given time and you will get rid of those things that maybe you once could defend to keep inside the portfolio [because it made sense], at least back then. Times change, investing in financial assets is not “day trading”, it’s investing over periods of time. However, you should never be married to any position because the environment is dynamic [always]. I have owned several positions more than once but only when I deemed it necessary to get to where I wanted to go. [Think of it sorta like taking an Uber somewhere – you get in, and you got out once you arrived at a destination. This is what you didn’t do – you didn’t marry the Uber driver, or fund his children’s education, or even include him in your gift giving for Christmas, you simply let him take you to a single destination and that’s all.]

Here are a few terrible reasons to hang onto something. If you ask yourself why you own something and the answer is something like “well my cousin Buffy works there”, or “it’s a household name” or “it went up for a long time so I bought it” – none of these are justifications to keep something in a portfolio. What I’m looking for from an investor [even myself], and you should be looking for from your trained advisor is more like, “we are seeing interest rates rise and the Fed is keying on slowing the economy therefore, this asset class has historically done well under these tightening conditions, etc.” or “we are witnessing strong demand that is believed to continue into the future for their innovative product/service of such and such.” Or “this sector is defensive by nature and I want to reduce risk in your portfolio and capture dividend payouts while we’re waiting for the economy to rebound”. There are numerous good justifications for holding onto or investing new capital but notice how none of the few I listed here were personal [reasons]. Never did I mention once how Uncle Buck’s half-sister’s husband Marty invested in it and he said it was good.

The bottom line is know why you own something and that should be about how that gets you closer to your financial goals, always. I’m going to extend this idea further, know why you own e-v-e-r-y s-i-n-g-l-e f-r-i-g-g-i-n-g t-h-i-n-g! And by doing so, now you can formulate a plan around some plausible expectations over time, which is going to assist you going forward with making much better personal financial decisions. I do believe it all starts with “why I, or we, own something”. If you can no longer defend something you own inside your own portfolio, it’s time to let that go. Remember, it can happen that in the future there will be enough justification to include it back into your portfolio, but at this time it makes no sense [and sometimes for numerous reasons]. Let me offer a real-life example, back in 2016 or so yields on municipal bonds got down to almost nothing. I’m talking about investing client money into an opportunity that was going to tie up considerable cash only to have them realize a lousy 1/2 pct. annual gain, which made zero sense. So, I went to those clients who had municipal securities maturing and the cash coming back in and basically advised them to not reinvest into bonds. Instead I said increase your stock exposure, with interest rates this historically low the stock market is a better option than a super-high priced bond market which will add nothing but downside risk to your portfolio. Over time I continued to reduce bond exposure as they were so high priced and not paying much of anything. That changed recently. With the Fed continuing to raise rates bonds have now returned to my radar screen. Depending on the circumstances in the new year, there’s at least a probability that [high quality] bonds can outperform the stock market, after all it’s a fluid situation so stay tuned. All kinds of bonds are an asset class I completely under-weighted for years, so things do change and your portfolio should follow along in order to get you to your own personal “promised land”? One last thing, always invest in that which is scarce, I’m not going to elaborate on that subject as it’s beyond the scope of this text, but think about what is scarce and in demand at particular segments in time. 😉

I hope you find my notes [from the trenches] prove useful. Here’s wishing both of us a better 2023… along with a Merry Christmas and a Happy New Year!