A Year in Review: Optimism is The Only Realism

Mark Meredith, CFP®

2022 is in the books. It was a year of many “firsts”. Never before had we witnessed both the broad equity index and the bond market index clocking double-digit percentage losses in the same calendar year. As depressing as that sounds to hear I must steal a line from industry legend, Nick Murray, to reiterate that optimism is the only realism looking forward. Markets have a history of rewarding the patient, broadly diversified investor.

Do I have any reason to believe that won’t be the case going forward? No.

The Business

Meredith Wealth Planning will be 4 years old in March of this year. The flat-fee, transparent approach to the advisory business has been successful thus far. We ended 2022 around $190 million in assets under advice for over 150 client households.

Scott Wimmer joined the firm in November and is the lead advisor for all new clients of the firm. He has yet to replace me as Chief Bottle Washer at the office, but the potential is there.

Our flat annual advisory fee will experience its first ever increase this year, going from $5,700 to $6,000 even. This $300 annual increase amounts to a little over 5%. Since 2019, inflation has run 4.34% annualized, eroding the value of the dollar by over 16%. These increases will be necessary from time to time, but hopefully few and far between. All existing clients will receive notice before this increase goes into effect for them.

The Family Grows

Rebecca and I welcomed our third child into this world in May of 2022, a baby boy named Bodie Wells Meredith. He will certainly grow up telling people he was born in a bear market. In the Meredith household, the real bear market was in sleep quality.

He joins his big brother, Sawyer (6), and big sister, Cecilia (3), to keep the good times rolling at our house. There are no dull moments. Who wants dull moments anyway?

My dear wife, Rebecca, has become passionate about pelvic floor health and over the next few years she will begin spreading her gospel. She’s already educated me on the fact that I have a pelvic floor, which was news to me.

A Great Time to Be Born

When our first child, Sawyer, was born someone said to me “I just can’t imagine bringing a child into this messed up world”. It wasn’t the most absurd statement I ever heard, but it’s up there.

I suppose I may be naive, but I think this is the best time in the history of the world to be born. The sheer advances in medical care alone are enough reason to justify that statement. Just over 200 years ago, over 44% of children died before age 5.

We also have nice little luxuries we all take for granted, such as electricity, internet, air conditioning, furnace, plumbing, refrigerators etc. etc. A middle-class family today experiences a greater standard of living than John D. Rockefeller saw at any point in his lifetime.

The advances in global wealth, literacy, medical care, food, human rights, and drinkable water coupled with the declines of global poverty, infant mortality rate, and many other areas certainly make this one of the best times to be alive in history. If you’re skeptical of anything I’ve stated here, check out the charts below which come from the riveting book, Factfulness by Hans Roling.

While some people look at the world today and see no hope for future generations, I think the best is yet to come. It’s almost as if “optimism is the only realism”.

Financial Markets

Stocks and bonds were both down 2022, somewhat significantly. This isn’t news to you. Surely, you’ve noticed.

Does this change anything we are doing to your portfolios at Meredith Wealth Planning? Not really. Bonds now pay more interest, and equities are now discounted from where they were previously priced. Therefore, expected returns going forward are now higher. We are happy with the return expectations going forward and would never hesitate to add to one’s investments at the moment.

Many alternative investments had a good year in 2022, such as managed futures and private credit. We implement some of these strategies in client situations where it makes sense. We continue to evaluate alternative investments to stocks and bonds, but one must tread very carefully in that space, and be conscious of the tax implications they can bring.

The investment philosophy of this firm is rooted in several key beliefs:

  • We believe reacting to current events will lead to substandard returns and possibly lifetime investment failure.
  • The economy can never be consistently forecasted, nor can the market be consistently timed for entry and exit points.
  • The most reliable way to capture the full return of equities and bonds is to ride out their frequent, yet temporary declines.

If one cannot accept those 3 bullet points, I am afraid they are likely to suffer very mediocre long-term results. Of course, there are tweaks one can make to their portfolio that can potentially add to long-term results, but we won’t cover that here and those tweaks do not invalidate the points above.

All eyes remain on the Federal Reserve Bank in 2023, and Jerome Powell has not batted an eye that he will do exactly what he thinks it takes to combat inflation. How long will that last, and to what extent will it go is the key question. The most recent inflation reports have appeared more promising.

Zooming out the lens a bit, if we just look back to what global equities did since this firm came into existence it may surprise you. From March of 2019 – December 2022, the Vanguard Total World Stock ETF earned 6.90% annualized (2.43% after inflation). It’s no eye-popping return, but certainly not terrible. We saw a lot of terrible news events during this time period.

Despite all that has occurred since March of 2019, someone who pulled a Rip Van Winkle and woke up at the end of 2022 would have noticed a moderate increase in their wealth. This despite the fact that news outlets seem to have a mission statement that involves scaring their viewers to death on a nightly basis, as they do not seem to understand that “optimism is the only realism”.

Pessimists and Charlatans

Speaking of news, the infamous Paul R. Ehrlich recently appeared on 60 Minutes. For those unfamiliar with Mr. Ehrlich’s work, consider yourself lucky. He’s been wrong about nearly everything he has ever predicted, yet 60 Minutes has decided he is still a serious person that should be given a platform. Why would they do that? To garner your attention. Plus, some people love catastrophists.

This is no different than financial media endlessly trotting Peter Schiff out there for the next doomsday forecast. On the other end of that spectrum we have Ms. Cathie Wood, who predicted at the end of 2021 her ETF would compound north of 40% annually the subsequent 5 years. Let’s check in on Ms. Wood’s performance in 2022:

Well there you have it, if you invested $1 million in ARKK on 01/01/2022 you’d have about $330,000 by 12/31/2022 (minus inflation). To hit her 5-year return forecasts, she now has to compound at nearly 101% annualized the next 4 years. Unlikely.

By the end of 2020, she was outperforming the S&P 500 index by roughly 24% annualized since inception. Since then, she has given back all of those excess returns:

ARKK ETF performance

Buffett famously stated that “when the tide goes out you find out who’s swimming naked”. In the case of 2022, we found that out about Cathie Wood and a fellow named Sam Bankman-Fried. I have nothing to say about Bankman-Fried that hasn’t been said a million other places.

I am certainly a cryptocurrency skeptic, but what baffles me is that most of the carnage we have seen in crypto land has been due to the centralization into various exchanges when the whole bedrock of cryptocurrency was decentralization. Ironic.

Jason Zweig of the Wall Street Journal once wrote the following:

“Lie to people who want to be lied to, and you’ll become rich. Tell the truth to those who want the truth, and you’ll make a living. Tell the truth to those who want to be lied to, and you’ll go broke.”

Eternal optimists can be annoying, sure. However, no one proclaims themselves a pessimist. Pessimists often try to state they are “realists”. Unfortunately for them, pessimism is the exact opposite of realism.

Of course, we cannot be blind to the fact that many people have had or continue to have absolutely terrible experiences here on Earth. The Earth as a whole is progressing forward, and the masses become better off.

We are in the glory days of human progress. Moses shared roughly the same travel capabilities as George Washington, meaning the fastest that each of them could travel was at the speed of a horse (less than 50 miles a day).

Here just 223 years after George Washington’s death, one can fly 9,537 miles from NYC to Singapore in 18.5 hours.

What Lies Ahead: More Automation

Late in 2022 myself and many others were amazed to see the capabilities of ChatGPT. Take a look at it in action as I asked the chat bot to write a 500 word minimum blog post with a table describing the differences between a Traditional IRA and a Roth IRA (enable full screen mode to get the full effect):

Not impressed? That’s ok. It can handle much more than a simple Roth vs. Traditional IRA comparison. Pressing for help throughout a conversation with ChatGPT can lead to it writing code for you. Whether or not it is a viable code is beyond my comprehension, but this is a tool with a lot of potential.

The future is not a kiosk in McDonalds taking your order on a screen. The future is you talking to artificial intelligence at a McDonald’s drive thru thinking you are talking to a human. Well, hopefully our future has more salads and less McDonalds.

Market Forecasts!

After Scott’s exquisite blog post about the failure of market forecasts, I’d sure be foolish to present you with one. But I will say this, with a 5-year US Treasury currently paying 3.91% I think you will earn around 4%-5% annually on a diversified (that includes treasuries and corporate bonds) intermediate term bond fund over the next 5 years.

With the Forward Price to Earnings ratio on the S&P 500 right at 16.57, which is just a hair below its 25-year average forward P/E, I’d guess over the next 10 years we will see similar broad market returns to what we saw the last 25 years. The Vanguard 500 Index with dividends reinvested returned 7.53% annualized from 1998 – 2022.

Thank you to everyone who has been a loyal reader of the Meredith Wealth Planning blog over the past year. It is a true joy every day to work with the clients I have.

Disclaimer: You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.

Don't go through retirement alone.

Step 1) 30 Minute Consultation

A quick chat to get to know each other and learn more about what you're looking for in an advisor

Step 2) Think About It

We know that working with an advisor is a big decision, take some time & sleep on it

Step 3) Recommendations, Strategy, & Implementation

When you're ready, we get started with our planning process

Talk with a retirement partner today
A no-pressure, 30-minute conversation to see if we're the right fit for you
Schedule Your Free Consultation