Lemons to Lemonade

Mike Zaccardi

MORE WEALTH HAS been lost in this year’s stock and bond market decline than in any previous downturn, according to research firm Bespoke Investments. And, no, that doesn’t include the $2 trillion of crypto value that’s gone up in smoke.

A counterpoint to this jarring reality: Folks today are wealthier than during previous bear markets. Goldman Sachs reports that U.S. household net worth as a percentage of disposable personal income remains sharply above pre-pandemic levels. This metric is also above where it stood at any time from 1960 through 2020.

All this isn’t as contradictory as it might seem: More wealth means our losses have a larger dollar value. If you’re like me, a 20% or so hit to your stock funds feels bigger than ever—even bigger than during the larger percentage declines experienced in 2008. That’s simply because of bigger portfolio values this go-around.

My advice: Stop focusing on your losses—and ponder how to position yourself for the eventual market recovery. Rebalance your portfolio. Consider a Roth conversion so future gains will be tax-free. Take tax losses and move the proceeds into better-diversified, lower-cost investments.

Also increase your monthly savings. For instance, you might boost your 401(k) contribution percentage. Upping your retirement plan savings from, say, 6% of income to 10% means you’ll buy more shares during this dip, but it likely won’t feel like a big loss to your paycheck. Indeed, if you find that it isn’t a strain on your finances, persisting with that higher savings rate will lead to a much bigger net worth over time.

What’s unique about 2022’s bear market is that, so far, unemployment remains exceptionally low, and consumers are still flush with more than $2 trillion of excess cash, according to Goldman Sachs. That means many households, while frustrated by high gas and food prices, are well positioned financially to meet the rising cost of living. They can also put more of that cash to work in attractively priced U.S. stocks and bonds, as well as cheap international markets.

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11 months ago

Interesting read, Mike, as it helps provide some contrast – this always a good thing!

I would take slight issue with the article’s opening statement, though: “More wealth has been lost in this year’s stock and bond market decline than in any previous downturn”.

Market volatility should not be confused with actual market losses, which only occur when we liquidate a position and move into cash. Most seasoned investors are not about to liquidate the entire balance of their retirement assets during a market downturn. The number of shares they own moving forward has therefore not changed, only their relative short-term value.

Volatility is the price an investor must willing to pay for potential long-term returns that offset the greatest “loss” exposure that we all have to deal with: the peril of inflation eroding our future purchasing power.

It’s an obscure distinction, admittedly – but one that still I think is worth remembering in market cycles like the present.

Last edited 11 months ago by Newsboy
Kevin Madden
Kevin Madden
11 months ago

Is it $2 trillion of excess cash, excess savings or excess wealth? They are very different things. Could it be that an increase in wealth is tied up in real estate and pre-tax savings, so not easily tapped for meeting the rising cost of living?

11 months ago
Reply to  Kevin Madden

“Excess savings currently total around 14% of a year’s spending, with almost all saved in bank accounts and other liquid assets,” Joseph Briggs, an economist for Goldman Sachs, observed in a research note on Sunday.

11 months ago
Reply to  parkslope

The total amount of excess savings is correct, but needs the additional context that roughly 70% of this total is held by the top 2 income quintiles. Top income earners had and still have plenty of spending power, but maybe not so much for everyone else.

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