Bracing for a storm that's only going to get worse
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Each month, on the second weekend, I pay my expenses, check my investments, and calculate my net worth.
In 2021, it was fun watching my net worth grow every month. In 2022, it has been a miserable practice.
Since I am young, I have a great deal of my net worth tied up in equities. I also have plenty of time for these investments to recover. My current net worth is now lower than it was at the end of 2021. Not a great discovery, but a lesson with plenty of takeaways for the future.
How We Got Here
Broadly speaking, markets have tanked. Stocks peaked in January and crypto peaked in November 2021.
Bitcoin is down ~60% in the last year. The S&P 500 is down ~25% year-to-date.
The leading cause of declining markets is the Federal Reserve and its policy change. After responding to the shutdowns and economic slowdown caused by COVID with extremely loose monetary policy, the Fed has changed course. Expect they took too long in changing strategy.
By allowing the loose monetary policy to persist for as long as it did, theFed helped induce unreasonably high inflation. Now the Fed is trying to tighten as fast as it can. Controlling inflation is their number one priority.
The Fed deserves criticism, but the markets crashing is not 100% their fault. The war in Ukraine hasn't helped. Neither has consumer behavior.
Specifically speaking about myself, I had several one-off large payments that needed to be made, and my portfolio was heavily exposed to these crashing assets, resulting in a lower net worth.
My Portfolio
Speaking of my portfolio, below is a comparison of where my money is invested.
When I said earlier that I was heavily invested in equities, I wasn't lying. I believe stocks are a great investment based on their track record and future potential.
The real estate category listed in the table is all in Fundrise. I have increased my contributions in 2022 to Fundrise. Additionally, the real estate market hasn't (yet?) gotten hit like other markets. Based on how other markets have performed, I'm happy I diversified a little.
With how the beginning of 2022 unfolded, I wish I had put stockpiled more cash. But hindsight is 20/20 and there's no room in life for regret, only lessons for the future. The increased interest rates are new to investors my age and the impact the Federal Reserve has will not be forgotten.
Psychological Impact
If your investments in 2022 haven't panned out, hopefully, you find solace in hearing there are others who also struggled.
One of the unfortunate aspects of recent months is the psychological impact of the market sell-off.
It is a disturbing thought to know that after ~10 months of hard work, living within my means, and steady investing, I now have less money than before. And with inflation driving up prices, my purchasing power is being diminished from both sides.
It is also upsetting to think how much money has been invested in the market only to lose value. Mydollar cost averagingstrategy has not paid off, not yet, at least.
All that money invested would have been better left as cash, either to invest in the market at low prices or to spend for enjoyment.
It is hard to be as motivated in an environment whereinflation is soaringand markets are falling. No matter what I do with my money, it will lose value.
But it is also important to remember, things will get better. Hard work pays off. Good investments yield good returns in the long run.
Where Things Could Be Headed
Predicting where the market is headed is difficult. Mainly because there are so many factors, all of which are out of our control.
Stealing a quote I recently read and enjoyed from
They’re an unelected, unaccountable, bureaucratic institution that has more power over our lives than any other entity on the planet.
So we have no control over how the stock market or actual economy will play out in six months or a year.
Here's what is likely to happen: the Fed will raise interest rates; unemployment will also rise.
Equity valuations can go even lower. Some experts think we are near the bottom. Maybe we are, maybe we aren't. Either way, I think the market and the real economy are a ways apart. 2023 could see higher unemployment and industry changes. No one enjoyed the mass layoffs in 2008 or 2020.
The stock market might turn around in 2023, but our economy may still bein a recession then.
I'm still committed to my dollar cost-averaging strategy in the stock market. 2022 is an anomaly (although the same was said for 2020 and 2021 — albeit for different reasons), net worths may have fallen, but good habits will lead to wealth over the long term.
$S&P 500(.SPX)$ $Bitcoin Group SE(BTGGF)$ $REIT(REIT)$
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