2022: The Year Your 401K Would Like to Forget

2022 was not a good year for your 401K. It was particularly painful because the bond market’s negative returns were almost as bad as those of the stock market. Stocks go up and down by large amounts regularly, but such one-year losses in bonds have never occurred over the past 100 years.

How bad was it? Nothing much has changed since I wrote in an earlier note that it’s been an utter rout. Let’s look at the performance of US stocks and bonds* for 2022 and for the 10-year period ending in 2022.

2022 Performance

• Stocks:  -20%
• Bonds:  -13%

10-Year Annualized Performance

• Stocks:  12%
• Bonds:  1%

If your 401K is invested in a target date fund, its performance should be somewhere between these numbers as it is mostly a blend of stock and bond funds.

Here are two inferences to draw from these performance results:

1. Over the long run, stocks have done well. Historically, stocks average ~10% annualized returns and these past 10 years have been significantly better.
2. While stocks did worse than bonds in 2022, over the long run, stocks have outperformed bonds. Historically, bonds average 4 to 5% annualized returns and these past 10 years have been worse than that.

Why do people invest in bonds at all?

They’re safer than stocks in the sense that their prices fluctuate less over time. 2022 was unique in terms of how much value bonds lost. If you have a long-term investment horizon, you can see that historically, stocks have been a much better bet.

However, if your time horizon is short (e.g., you’re saving up for a down payment, a kid’s upcoming college education, or your expiration date is near), bonds are a safer haven for at least some of your savings.

What should you do?

I’ll make a few points:

• If you’re young and your time horizon is long, invest in a low-cost equity index fund. Remember, most of your lifetime wealth creation is in front of you and your older self will, almost certainly, be grateful you took the risk. Plus, everything is now 20% cheaper than it was a year ago. What a deal.
• If you’re old, this has been a painful year but remember that your true net worth is more than your shrunken savings. You may still be working, collecting Social Security, and/or have equity in your home. All these add to your overall net worth.
• For your psychological health, anchor on a longer period instead of just 2022. Over 10 years, your investments have done just fine.
• Similarly, remember you’re not alone. While your net worth may have shrunk in 2022, so did everyone else’s. To the extent your self-worth is tied to comparing yourself to others, not much has changed. Be grateful you weren’t clever enough to have owned bitcoin or Tesla stock as those asset each shrunk by ~65%. It could be worse.
• Delay claiming Social Security until age 70. You and/or your spouse will likely end up with more over your lifetime.
• Finally, maximize all the tax-advantaged opportunities you have to save with workplace retirement plans, Roth IRAs, HSAs, 529s, and US Treasury inflation bonds. These add up over time.

Here’s to a better 2023.

^{* As I’ve said previously, there are lots of measures of the “bond market.” I’m using Vanguard and Fidelity’s flagship intermediate term bond index funds as my proxy for the overall bond market. If your 401K is invested in a target date fund, its bond portion is probably invested in something similar to these funds.}