Learning the Hard Way: 2022 Portfolio Rankings

Psychology, Portfolios

Now that we’ve had a few weeks to recover from the holidays and start planning for the new year to come, it seems like an appropriate time to revisit the events that made 2022 such a uniquely memorable year in the investing world. It ended up one of the worst years on record and I imagine most people are ready to move on. But before we all pick ourselves up and start anew after the carnage, I think it’s important to put what we all experienced into proper historical context.

Sometimes the hardest lessons are the most educational.

How did each portfolio option fare in a truly tough time to invest? How does this past year compare to other bad years that came before? And what can we learn to affect our path forward?

I’ve got the data for all of the 2022 portfolio rankings. So let’s find out.

No shelter from the storm

The really interesting thing about 2022 is how so many factors swung against investors simultaneously. Between a plummeting market that pummeled stocks, rapidly rising interest rates that wrecked bonds, and sky-high inflation that drove down the value of every asset, it seemed like the entire financial world conspired to slash the purchasing power of all investors. Classic diversification strategies came up short and even those who sat on the sidelines in cash watched the price of gas and eggs eat away at their savings.

So to start, let’s get right to the point and look at the inflation-adjusted returns of every Portfolio on the site in 2022. I’m going to focus on portfolios from a US perspective, although I also welcome readers outside the US to browse the portfolio data on their own for local translations in their own local currencies.

chart of 2022 portfolio rankings

As you can see, all portfolios experienced significant losses between 15 and 25 percent. So if you had a tough year you’re not alone.

The two that fared the best were the 7Twelve Portfolio and Ivy Portfolio. They owe their relative success to a shared investment in commodities, as that’s one of the very few asset classes that posted gains on the year. The portfolio that fared the worst was the Total Stock Market portfolio, which often comes up on worst-case lists due to its natural volatility. When you place your bets on one asset, sometimes it just doesn’t work out. And the rest fell somewhere in between those extremes with nobody spared from the drawdown.

As painful as 2022 was for investors, though, the important thing to realize is that it wasn’t particularly unique in a historical sense. Here’s the exact same chart including the worst single years for each portfolio since 1970. In case you’re interested, I took the liberty of listing the years that set each worst case.

chart of portfolio losses in 2022 and the worst year since 1970

It’s true that 2022 was pretty extreme, and you can see that it set the new worst-year record for 6 different portfolios. But that also means that the other 12 have experienced even worse years in the past. Sometimes far worse! Wait — you didn’t know that 1974 and 2008 were such bad investing years, too? Well, that’s why understanding history is important.

Here you can start to appreciate the problem with drawing conclusions too quickly from one single year of returns. If you’re tempted to conclude that the Ivy Portfolio is uniquely safe, how does the knowledge that it experienced double the loss in 2008 affect your perception? If you look at stocks and decide that if you can deal with 2022 you can deal with anything, how would a much more significant loss make you feel?

To extend that thought, here’s one more chart that looks beyond single bad years and adds the deepest year-over-year compound drawdown.

chart of worst portfolio losses including deepest drawdown

If you thought 2022 was painful, it has nothing on history!

While we’re here, take a look at the Golden Butterfly and All Seasons portfolios and note that 2022 marked all-time worst case drawdowns for both. There are a few ways to think about that.

  • Portfolio skeptics can gloat and point out that they’re not as safe in absolute terms as people previously thought.
  • Portfolio fans can feel reassured that the deepest drawdown they just experienced is still better than what almost every other portfolio dealt with at some point.
  • And simple portfolio students with no skin in the game can observe that while all portfolios will eventually set new lows, some asset allocations are clearly are less susceptible to major drawdowns than others.

No matter how you invest, pick the right portfolio for your needs and you can trade perpetual anxiety and insecure bickering for quiet confidence.

When the numbers change

Beyond the normal drawdown talk, one of the more interesting things about 2022 from an analysis perspective is how such a sharp decline affects portfolio metrics. It’s easy for many people to spend hours agonizing over maximizing basis points, but what happens when all of the data that drove those decisions changes overnight?

As an example, check out the average returns of each portfolio starting in 1970 and ending in either 2021 or 2022.

While some people think of long-term averages as immutable traits, it’s actually normal for one year of data to move a long-term average by half a percent or more. If you’re using that average to project your portfolio growth into the future or to seed a Monte Carlo simulation, that half percent can make a pretty big difference over time. But importantly, the market history and innate portfolio behavior didn’t change at all. It’s just that averages are moving targets.

To account for that natural uncertainty in a way that people can understand, I like to use special metrics that look beyond over-simplified averages. For example, the 15-year baseline return looks at every 15-year compound return on record and reports a conservative 15th percentile number that represents the lower end of the spectrum. Here’s how 2022 affected those numbers.

15 year baseline returns for every portfolio
Note that very small differences (less than 0.1%) in the two bars are simply due to updated fund expense ratios that tweaked the results pulled on different dates.

While 2022 was definitely a big enough drop to push a new series into the bottom 15% of outcomes in several portfolios and bump a new low up unto the baseline range, you can see how the effect is much less pronounced than in the average. By focusing on conservative outcomes, it takes much more than one bad year to drastically shift the numbers.

Speaking of conservative numbers, the best example is probably withdrawal rates that focus exclusively on the worst cases. Here’s how 2022 affected the 30-year safe withdrawal rate for each portfolio.

Same point about expense ratios. Very small variations are just due to data sampling times.

Depending on how many articles you’ve read lately lamenting the demise of withdrawal rates based on current economic conditions, you may find that chart pretty surprising. Because classic withdrawal rates report the worst historical outcome on record, they really don’t change all that often. With enough history you’re bound to come across some really bad times that occured long before you started to pay attention, and not even 2022 drastically moved the needle. For context, scroll back up to the max historical drawdown chart and let the true worst cases really sink in.

But that’s not to say that there aren’t important insights to take away from trends in safe withdrawal rates. For example, one of the most interesting things to note is that the two portfolios which lost the most in their SWR values from last year — the 7Twelve Portfolio and Ivy Portfolio both dropped a little over 0.1% in their 30-year SWRs — should sound familiar. They were the best two portfolios in 2022! That’s not an error, but explaining the reasons for that apparent discrepancy requires venturing deep into the weeds of withdrawal rate methodologies. So I’ll save that for another time, but isn’t it interesting how measurable real-world results can be so unintuitive?

From averages to withdrawal rates, some metrics are far more sensitive to single bad years than others. That’s why I not only take the time to update portfolio data every year but also put in the effort to explore non-standard metrics that describe asset allocation from different angles. While reactionary investors constantly chase their tails as markets ebb and flow and freak out about every big loss, smart researchers with the right tools and perspectives can understand the shifting numbers in meaningful and actionable ways.

The greatest lesson from the 2022 markets

Beyond portfolio drawdowns and the nuances of different metrics, I think the most important lesson of the last year is less about data and more about perspective.

Nobody likes to lose money. But I would argue that one positive to come from the downturn of 2022 is how it finally broke the new wave of irrational exuberance that took over the markets after the last major crash in 2008. Sure, the 2020 pandemic was rough but it was only a brief pause followed by an equally swift bounce that arguably made investors more over-confident than ever in their ability to deal with a down market. But now, for the first time in a generation investors are seriously talking about the dangers of volatile markets and the importance of risk mitigation. Maybe we all had to learn the hard way, but the lesson is finally sinking in.

No matter how you invest, there will come a time when your portfolio faith will be challenged. How that adversity affects you will ultimately have nothing to do with throwaway terms like “risk tolerance” or your willingness to cover your eyes and stay the course. Instead, your success or failure will be determined largely by your expectations and strategy.

Does your financial plan depend on rosy averages staying constant, or do you understand real-world lower-end possibilities and plan for the worst? Even given the exact same portfolio returns, one group is doing just fine right now even as the other scrambles to pick up the pieces.

So as you evaluate your own returns from the last year and refine your strategy looking forward, keep a few things in mind:

  • No, 2022 is not the worst it can get. Are you prepared for markets to go even lower?
  • Even data-driven people can get too hung up on certain numbers like averages that change more than they think. Are there other metrics than can help you look at numbers in more sustainable ways?
  • When is the last time you studied the full history of your own portfolio beyond the recent past that you personally experienced? And how will you react when similar events inevitably repeat?

Those are all questions I wrestled with years ago, and answering them wasn’t easy. A lot of that information wasn’t available at all, and the evaluation process involved making a lot of my own tools and collecting historical data from a multitude of obscure sources. But this is your lucky day, as those same tools were the foundation of all of the Charts here at Portfolio Charts. So my pain is your gain, and all you have to do is take the time to explore.

Don’t let 2022 go to waste! Take a moment to appreciate the past, and even the most painful experiences can be great learning opportunities.

Help me track the good and bad returns for many years to come