Who turned the buckets upside down?
Posted on December 30, 2022

This post displays our portfolio return for our 12-month year ending November 30 and compares returns to prior years in my lifetimes. Stock returns were the 6th worst in my lifetime. Bond returns were THE worst in my lifetime. The return on our portfolio – for our current mix of stocks and bonds – was 5th worst in my lifetime. UGH.



I also display our portfolio returns for three groups of holding periods: some like to view the groups as buckets. Since bond returns were worse than the very poor stock returns, the buckets were upside down: when stocks crater, the most conservative, near-term bucket is supposed to perform much better than more aggressive, longer-term buckets; that was not true this year and has never happened for at least my lifetime. The buckets are upside down.



== My stock and bond returns ==


I showed the calculation of our real, inflation-adjusted stock and bond returns for my 12-month year in this post. I repeat them here:



Note: The picture for the 2022 calendar year will be different – worse for all of 2022 – than I display for my 12-month year ending November 30. For example, the calendar year year-to-date return for our stocks – with just today to close out 2022 –is -24% real return as compared to -18% on November 30.


Stocks: Our real, inflation-adjusted return for stocks rank as sixth worst in my lifetime.


Bonds: Our real return for bonds ranks as THE worst in my lifetime, and the worst in history stretching back to 1871.


Bonds when stock crater: Bond returns historically have been MUCH better than stocks when they crater: bond returns averaged ~20 points better than stocks. That’s why I consider bonds as insurance. When stocks crater, we use our insurance – sell bonds for our spending: we minimize damage to our portfolio, and we buy time for stocks to recover. Bonds failed miserably as insurance this year.



Our portfolio return: The real return for our portfolio ranks as the fifth worst in my lifetime. Since we all had more money at the end of 2021 than we ever had in our lifetime, 2022 was the biggest annual dollar decline in our lifetime.



== Groups of holding periods ==


I also like to view my portfolio returns for three groups of holding periods. A holding period is the number of years that Patti and I will hold an investment before we sell the securities for our spending. All of us are selling slices of our portfolio each year for our spending, so we have many holding periods. I recast all the future years into three holding periods each with an appropriate mix of stocks and bonds for the length of the holding period.

Some describe the holding periods as three buckets. I imagine a process of emptying a wine barrel and bottling the contents to drink this next year; I changing the mix of stocks vs. bonds in barrels so that the wine properly ages. I’ve described my imaginary “bottling day” each December 15 several times; here’s one description.



I show the returns for my three groupings for the last eight years here. This year was VERY unusual: bond returns for my 12-month return period were worse than stocks. Any grouping that contains bonds will be worse than a grouping that solely contains stocks. The short-term bucket should have been the best performing bucket, but it was the worst. In this sense, the buckets are upside down.




Conclusion. I compared our stock, bond and portfolio returns to past years. Returns this year were dismal, but I don’t have to tell you that. Stock returns were 6th worst in my lifetime. Bond returns were THE worst in my lifetime. Stocks stunk and bonds were worse in return. One would think – given the sharp decline for stocks this year – that a conservative mix if 80% bonds and 20% stocks would perform better than an aggressive mix of 100% stocks, but that was not the case this year: all portfolios with greater mix of bonds performed worst than portfolios with less bonds.

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