Tough Year for Investing (with one little-known, totally safe exception)

There’s still a few more days left in the year, but at this point it is safe to say, unfortunately, that it was a very bad year for investing. This Google chart shows most of the bad news. Note: nothing in this post is investment advice about the future, just a summary of the past.

The S&P 500, the typical benchmark for US equities, was down 20%. Bonds, usually a safe haven, were down over 14% as measured by the Vanguard Total Bond fund (more on bonds later).

Gold, the traditional hedge against bad times, was flat. I guess that’s not so bad. But gold is also traditionally considered a hedge against inflation, and inflation will probably end up being somewhere in the range of 5-7% this year (depending on your preferred index). So in real terms, even gold was down. And the supposed new hedge against fiat currency? Bitcoin is down 65% (crypto has other potential redeeming features, but inflation hedging was supposed to be one of them).

Did anything do well? Oil was basically flat too, starting and ending the year in the $75-80 range. Of course, oil companies did very well this year — Exxon is up over 70%, since prices were elevated for much of the year. But picking individual stocks is always fraught with danger. For example, you might think electric car companies would have done well in the past year, given the high gas prices for much of the year, yet Tesla was down over 70% (I won’t speculate here about why, but it may have other idiosyncratic explanations).

There is one boring, sleeper investment that would have earned you a decent return. Not a massive return, but one that will likely be slightly higher than the rate of price inflation (once we have complete inflation data). And the investment is totally safe, and by April you would have known exactly your rate of return for the full year: 8.5%.

That investment? Series I Savings Bonds, issued by the US Treasury. Series I Bonds pay a fixed rate of return for 6 months, which you know at the time you buy it. The interest rate rests every 6 months based on the rate of CPI inflation. If you invested in these bonds in January 2022, you would have earned 3.56% for 6 months, and then you would have earned 4.81% for the second half of 2022. And this was all known as early as April 2022 (though not officially confirmed by the Treasury until May).

While a lot of people were talking about the possibility of high inflation at the beginning of 2022, I don’t recall many people advising anyone to buy these bonds. It’s not a super well known investment, and not super exciting. Plus each investor is capped at $10,000 per year in most cases, so you couldn’t have moved all your money into I Bonds. Another restriction is that you lose some of the interest if you pull the money out before 5 years.

Still, this was one bright spot in an otherwise terrible year for most broad investment types.

3 thoughts on “Tough Year for Investing (with one little-known, totally safe exception)

  1. Scott Buchanan December 28, 2022 / 7:16 pm

    Great info. Yes, with bonds as well as stocks down, this has been one of the worst years ever for the traditional 60/40 portfolio.
    Agreed on I-bonds being a great place to park some cash. For more info on how to buy them, see https://letterstocreationists.wordpress.com/2022/01/04/how-to-earn-7-in-u-s-i-series-savings-bond-or-9-stable-interest-in-a-crypto-account/
    (ignore the second half of that article which touts crypto account).

    Another investing strategy beside plain stocks or bonds is to buy into securities which pay a high (like 8-12%, these days) yield. As long as they have a business model that give reasonable prospect of maintaining or even increasing these high dividends, you can to a first approximation ignore gyrations in their stock prices. Ares Capital (ARCC; current 10% yield) and Arbor Realty (ABR; 11.7% yield) are examples of these securities. If their price goes down, no worries, just buy even more shares as you reinvest the dividends.

    Like

  2. Andrew December 28, 2022 / 9:22 pm

    Are Series I Savings Bonds the same as a term deposit at a bank? Roll it over every six months?

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s