This past year humbled even seasoned investors. Bonds went down with stocks, which goes against standard investing theory. And the value in value investing was hard to find. Dividend funds and stocks did better than most, but many still posted painful losses.
That's the whiny tune we've all heard for months — investing 2022 was a hellscape.
Or was it?
If you used 2022's market volatility to your advantage — investing in energy stocks, trading options, short selling stocks, buying I Bonds and, late in the year, buying Treasury bonds — you may have reveled in the churn, turning lemons into sweet lemonade.
In trading, as in life, perspective is everything.
"This has actually been the best year I've had since the financial crisis of 2008," said Don Kaufman, an active investor, short seller and chief market strategist at TheoTrade, a trading education site.
What's more, Kaufman added: "You could see this one coming from a mile away." The Fed started signaling that it would raise interest rates long before it did it, says Kaufman. And that meant the bear would chase away the bull.
Investors have been sharing 2022 tales of triumph and woe with IBD. As this topsy-turvy investing 2022 year comes to a close, it's time to study survival strategies and glean lessons. Who did well and why?
And as the bear ran through some portfolios, eating away capital, how did investors protect their portfolios and their mental health, or at least their sense of humor?
But before we get to the trading tales, let's review what happened in 2022.
Investing 2022: Inflation Gave The Bull The Horns
After staging a robust bull market following the short pandemic-induced bear, the S&P 500 index peaked the very first week of 2022. But by mid-October it had plummeted 26.7%. During the same period, the Bloomberg U.S. Aggregate Bond Index gave up about 16%.
The S&P has recovered some, though by Friday it was still down more than 19% from the beginning of the year.
These drops slammed 60/40 portfolios. In a 60/40, long considered the foundation of a diversified portfolio, equities comprise 60% of an investor's funds and 40% goes into bonds. Looking back through the years to 1929, "There have only been three years where bonds didn't go up when stocks went down," said BlackRock in a recent report.
Why the double-drop this year? BlackRock recommends a look back to the late '60s, sometimes called the Great Inflation. Several factors were at play: "loose monetary policy, generous fiscal stimulus and energy supply disruptions, (which) sparked a decade of higher inflation," says BlackRock. Hmm, that has a familiar ring to it.
And as prices spiked at that time, "The Fed belatedly shifted into inflation-fighting mode by rapidly raising interest rates," says BlackRock. Bingo, the perfect storm, and 2022 mirrors it.
However, unlike the 1973 to 1983 period, when global inflation averaged 11.3% a year, inflation may now be easing.
In November, consumer prices rose 7.1% from a year ago. That was off sharply from the 7.7% increase in October, and down significantly from a recent peak of 9.1% in June.
Selling Short: Analyze Executive Trading
Like Kaufman, Steven Jon Kaplan, founder and CEO of True Contrarian Investments of Kearny, N.J., saw warning signs of an overheated stock market back in 2021. He says net inflows into equity funds were at a "feverish pace."
"We also had the heaviest selling in history by the top executives of large-cap growth shares, including many well-known technology companies," Kaplan said. "Therefore, I advised my clients to sell as much as possible and to sell short some funds."
He added: "Having these short positions, and limited equity exposure, helped to make 2022 a decent up-year overall."
Late in 2022 and going into 2023, he sees another opportunity to short-sell. "Energy shares were a big winner in 2022 — but now top energy executives are selling shares as aggressively as top tech insiders had done a year ago," he said. So he's now short selling some energy funds.
How Investors Fought Stock Price Ebbs
Savvy investors followed important downturn rules to avoid capital erosion in 2022. First, they were mercenary when it came to cutting losses. IBD advises selling a stock when it's down 7% or 8% from your purchase price.
Investor Carlos Suarez says he's been "vigilant in getting out" of stocks that took a tumble. And because 2022 was so volatile, he decided to take things a step further. He's now cutting and running when a stock goes "down about 5% — once it crosses 5% I'm out."
Patrick Miller also adhered to the 7% rule. "When things started to turn" in early 2022, he said, "I started to circle the wagons and sold positions."
But he got his hand slapped too. "I kept trying to get into things (when the market would show a slight upturn)," he said. "I need to learn to sit on the sidelines and wait" for a true uptrend.
Miller, a commercial airline pilot, says he's been studying investing using IBD's educational videos, IBD Live and stock charts for several years. He's now managing his own stock portfolio.
Investor Alexander Voigt went to cash early in the year too. He says he learned a lesson back during the dot-com bubble.
"Back then, I kept holding stocks in the portfolio, and it took a long, long time to recover," he said. "That experience was one of the reasons for my extra degree of caution in 2022, and selling everything this time."
He says his strategy for 2023 is to keep a close eye on key financials of large-cap stocks, such as Apple, Google parent Alphabet, Microsoft and Amazon. Then as the market improves he'll use "dollar cost-averaging to scale up into new long-term positions, following stock price charts for timing entries."
But investor Scott Lieberman said investing 2022 didn't change his steadfast strategy: "Time in the market beats timing the market." He said he's "staying the course with companies" he believes "are well run and priced fairly."
Brian Greenberg takes the long view, too. "I've always been a long-term investor, so I've focused on the fundamentals: companies with strong business models and solid management teams," he said. He diversifies by investing in multiple industry sectors.
Investing Opportunities In Options
Some investors saw 2022 as a good time to further study trading, particularly the use of options. Besides short selling, Kaufman also traded options in 2022. He says volatility is "an options trader's best friend."
Catherine Trott, a longtime investor, traded covered calls against ETFs and index funds. She also benefited from the market's ups and downs. She calls herself an active investor who mostly prefers bonds, though she does trade some stocks.
Trott has been "writing covered calls against index ETFs when I thought there would be an uptick." She did this with energy stocks and ETFs, one of the bright spots of 2022, collecting income via call options on rising energy assets.
With a covered call, an investor holds an underlying asset, a stock or fund for instance. Then the investor sells a call option on that asset for a premium with a set expiration date.
A buyer of a call option pays the seller a premium for the option to buy the seller's shares (the strike price) by a certain date (the expiration date). The call buyer may exercise the option if the stock or fund's price rises above the strike price. The buyer gets to buy shares at the lower strike price no matter how high the market gets. The expiration date could be as short as a week, a month or longer than a year. The more time you have until expiration, the more possibility the stock can move in a favorable direction so the option will usually have more value.
Many traders use covered calls as an income strategy. You receive the premium for selling the call and if the stock trades below the strike price at expiration, you keep the premium and still retain the shares. It's like collecting rent on a property.
Of course, if the asset value declines significantly, the investor still loses money. But the premium received from selling the option will help offset the loss. If the asset rises significantly, your profits will be limited to the strike price. Profits above the strike price will go to the option buyer, since it is assumed the buyer will "call" the shares away from you.
I Bonds, Bond Ladders and Bonds
Many investors learned about I Bonds this year. These are TreasuryDirect bonds, which were paying 9.62% until Nov. 1, an outstanding rate, especially when weighed against a tough year for equities. The new I Bond rate is 6.89% (this fifth-highest rate ever lasts through April 2023). Using inflation data, the Treasury sets new rates for the bonds every six months.
The amount investors can put into I Bonds is typically limited to $10,000 annually, though that figure can be increased for families and those who own businesses.
"I invested in I Bonds," Lieberman said. This was "a no-brainer decision for money that would've been parked in a savings account anyhow."
Trott also invested in I Bonds. "I got into more I Bonds this year, but I was into them long before everyone else was yakking about it," she said. "I'm always scanning for the next better opportunity. And I like eggs (investments) that I think aren't going to break."
As Treasury bond rates began rising, Trott also used bond ladders as part of her investing 2022 strategy. "The rates are pretty good, and I don't have to worry about the credit quality," she said of Treasuries.
With a bond ladder, investors hold individual bonds with varying maturities as a hedge against rising interest rates. As shorter-maturity bonds come due, that frees up cash to put into bonds with potentially new higher rates.
And Trott has recently begun buying very highly rated corporate bonds. Interest rates on those have been rising too.
Be Systematic, Check Your Emotions
In a choppy year, emotions run high. Joseph Eschleman is president of Towerpoint Wealth, a financial planning firm in Sacramento. He and his staff spent time with clients this past year letting them vent, but also helping them to avoid being "overreactive."
"It has not felt like the great financial crisis of 2008, when we honed our talking-people-off-the-ledge skills every day," he said. By "systematically rebalancing your portfolio," he says clients can manage a rough market and not be "reactive."
Also, investors need "a dose of humility" in a difficult market when "nobody knows" what's going to happen. "Maybe the markets have bottomed out, maybe they haven't," Eschleman said.
"For me, it's all about knowing your risk tolerance and sticking to it," said Greenberg.
"Don't panic! Take a deep breath and remind yourself that this is just one small part of an investment timeline that will last decades," he added. "Even if your portfolio takes a hit after something like 2022 happens, it's still going to grow over time."
Suarez said he manages his emotions by keeping trading decisions "rule-based and very mathematical," as he evaluates his portfolio, makes trades and rebalances regularly.
