Monday, January 16, 2023

My Investment Return for 2022

My portfolio lost 4.9% in 2022, while my benchmark return was a loss of 6.2%.  This small gap came from my decision to shift to bonds based on a formula using the blended Cyclically-Adjusted Price-to-Earnings (CAPE) ratio of the world’s stocks.  After deciding on this CAPE-based approach, all the portfolio adjustments were decided by a spreadsheet, not my own hunches.  I started the year 20% in fixed income, it grew to a high of 27% as the spreadsheet told me to sell stocks, and now it’s back to 20% after the spreadsheet said to buy back stocks.  This cut my losses in 2022 by 1.3 percentage points.

My return also looks good compared to most stock/bond portfolios because I avoided the rout in long-term bonds.  My fixed income consists of high-interest savings accounts (not at big banks), a couple of GICs, and short-term bonds.  If long-term bonds ever look attractive enough, I may choose to own them.  My thinking for now is that I prefer the safe part of my portfolio to be very safe, and I certainly didn’t want to own long-term bonds back when yields were insanely low.

Another thing that helped my results look a little better is that I measure my returns in Canadian dollars, and the U.S. dollar appreciated relative to the Canadian dollar during 2022.  Even though my U.S. stocks lost money, they appeared to lose less money when measured in Canadian dollars.

One measure that doesn’t look very good this year is that my real return (after adjusting for inflation) was a loss of 11.0%.  I prefer to think in terms of real returns because what matters to me is what I can buy with my money.  So, while I hope to achieve somewhere close to a 3% average annual compound return, I fell behind significantly this year.  However, stocks have performed well since I retired, so I’m still on the upside of sequence-of-returns risk.

The following chart shows the cumulative real returns for my portfolio and my benchmark since I started investing on my own rather than working with financial advisors.  Each dollar I had in my portfolio in 1994 that remained invested over this entire period has doubled in purchasing power three times now.  The power of compounding shows itself over long periods.


Through all of the recent market turmoil, my calculated safe withdrawal rate (adjusted for inflation) has remained amazingly stable.  This is because I adjust the assumed future stock market returns based on the current blended CAPE of the world’s stocks.  As stocks rose, my spreadsheet assumed lower future returns, and as stocks fell, the assumed future returns rose again.

I try not to look at my portfolio spreadsheet too often, but when I do, I rarely look at my net worth.  I focus on the monthly dollar amount of my after-tax safe withdrawal rate.  I find this amount much more meaningful than the net worth figure that feels disconnected from day-to-day living.

10 comments:

  1. Michael, Would you consider sharing a (google or word) tempate of your spreadsheet even if simplifed? I've often looked for something like this but found very few options.

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    1. I've started to try to make a sanitized version of my spreadsheet, but there are so many edge cases that don't apply to me but might apply to others that I give up. The last thing I want to do is provide something that won't work for people.

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  2. My real returns for 2022 was a loss of 11.2%. Mostly just stayed the course with investments in VGRO and similar investments.

    Just starting retirement so I'm still sorting out the best approach for withdrawals (timing - which accounts). I used some of our space in our HELOC to buffer our withdrawals over the year, and will probably focus more on this over the next few years as we get more in a groove between our investments and spending!

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    1. Decumulation is definitely tricky. I wrote my own simulation software to test different plans to settle on a strategy of draining RRSPs early to make my income and my wife's income up to a particular marginal tax bracket. There are a lot of details that determine whether that's a good plan for others.

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  3. Cool post as always. My return was somewhat lower this year, about -10%. The difference is because I was not smart enough to avoid long bonds altogether and was just using a full bond index like XBB, and also because I hold some small amounts of other asset classes that didn't do so well.

    May I ask, when you say high interest cash, what instrument do you use? Do you use an ETF like CMR or CASH? Or actual accounts at small banks and such?

    Also, I know based on your previous posts that you follow some formulaic rules for overall asset allocation. You mentioned your fixed income portion was 20% most of the year. Does that mean the remaining 80% is all equity?

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    1. I used to use EQ Bank's savings account, but they started falling behind on the interest rate they offer, so I've shifted mostly to Saven (Ontario only, high interest, poor interface).

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  4. I enjoy your posts - always informative. You write “Each dollar I’ve invested over this entire period has doubled in purchasing power three times now. “ How do you calculate cumulative returns? If it’s the product of annual returns then would it not be more accurate to say each dollar invested in 1994 has indeed doubled in purchasing power three times, but amounts invested thereafter have returned other amounts? For example, it appears each ~$600 invested in 1999 have increased in purchasing power by 1/3 to ~$800 today

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    1. When I wrote that line, I intended it to mean those dollars that I invested as of 1994. Rereading it, I can see how it can be interpreted differently. I'll update the post to try to make it clearer.

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  5. Great informative article as always Michael. How do you buy your bonds? I'm guessing it's not a bond ETF. This is an area I really need to explore.

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    1. I've bought individual bonds in the past, but now I use ETFs: VSB with Canadian dollars and VGSH with U.S. dollars.

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