Stone Lake Wealth Management 2023 Year End Commentary
Dearest Friends,
I have often said that since I opened Stone Lake Wealth Management in 2017 we have had one historic event after another impacting the markets. The list includes but is not limited to:
1. Global Pandemic
2. Inflation Shock
3. Fastest interest rate hikes in 2 generations
4. Worst performance for diversified portfolios (60/40 stock/bond) in 2022 since the Great Financial Crisis.
5. Not one but TWO ongoing ground wars in Europe
In spite of all these incredible events concentrated in the past 7 years, a moderate risk level, broadly diversified portfolio that is the backbone of SLWM's investment process performed admirably.
**The portfolio and performance numbers below are using a hypothetical portfolio and for illustrative purposes only. Your individual performance will differ depending on the exact construction of your portfolio, when it was invested and your investment plan and behavior.**
SLWM Hypothetical Moderate Risk Portfolio Allocation:
CASHXCash0.50%BNDVanguard Total Bond Market ETF13.80%HYDVanEck High Yield Muni ETF6.90%VCITVanguard Interm-Term Corp Bd ETF13.80%VGKVanguard FTSE Europe ETF13.00%VWOVanguard FTSE Emerging Markets ETF6.50%IWMiShares Russell 2000 ETF9.75%SPYSPDR S&P 500 ETF Trust26.00%VOVanguard Mid-Cap ETF9.75%Performance Jan 2017 - Nov 2023
- Initial Investment: $100,000
- Monthly Contribution: 0
- Final Balance: $146,353
- Nominal Compounded Annualized Return (CAR) net of fees: 5.66%
- Real Compounded Annualized Return net of fees and inflation: 2.02%
While 5.66% CAR is solid but nothing to write home about, the amazing thing is that, even with the massive inflation shock and other market disruptions we experienced, the compounded real return net of inflation was still 2.02% for a static portfolio.
Now let's look at the numbers if we added a modest monthly contribution of of $250, which is 3% of the initial portfolio balance annually:
- Initial Investment: $100,000
- Monthly Contribution: $250
- Final Balance: $170,122
- Nominal Compounded Annualized Return (CAR) net of fees: 7.98%
- Real Compounded Annualized Return net of fees and inflation: 4.27%
A steady, modest, contribution to the portfolio took the CAR from uninspiring to fantastic both in nominal and inflation adjusted returns in spite of the largest inflation shock in 2 generations! The additional 2.3% COMPOUNDED nominal return required no thought, no market timing and no mental anguish. In fact, just turning your brain off and adhering to a predetermined investment plan cranked up your compounded annual return by 40%! So while the last 6 years and 11 months have been okay for owning assets, they have been an excellent time period for accumulating assets throughout the market's ups and especially the downs.
Just to drive the point home here are the numbers for a still reasonable $500 monthly contribution or 6% annual contribution to the portfolio:
- Initial Investment: $100,000
- Monthly Contribution: $500
- Final Balance: $193,891
- Nominal Compounded Annualized Return (CAR) net of fees: 10.05%
- Real Compounded Annualized Return (CAR) net of fees and inflation: 6.26%
With a 6% annual contribution the portfolio would have generated a double digit CAR and significantly outperformed the highest inflation we have experienced since the 1970s.
Humble Brag Alert: This type of broadly diversified, steady investing is exactly what SLWM preaches. The shocks to the system have been generational and one, the global pandemic, was once in a century. Yet the simplest and most boring approach to investing has yet again provided remarkable, wealth building results.
So where are we now as we enter 2024? Trick question! The answer is it doesn't matter. Investing is and always will be risky. The true source of risk for investors are negative shocks we can't anticipate, not the ones we can. (In academic finance parlance these are termed 'unknown unknowns'.) So we control what we can by implementing a steady investment approach with broad diversification and a long time horizon governed by an investment plan created from a calm and cool assessment of your financial goals and situation. This is what sets an investor up for the highest probability of long term success.
That said, I think 2024's setup looks good. Most economists are expecting the mild recession that never materialized in 2023 to come in 2024. This wouldn't be a surprise as historically it takes about 12-18 months for rate hikes to start to impact the economy. (If we had invested based on this consensus prediction we would have sat out while the SP500 rallied over 20% YTD!) The difference now is that with rates at 5.25% if things slow the Fed has a lot of room to cut rates to restimulate the economy should the slowdown become concerning. Another major difference is that most homeowners have locked in mortgage rates between 3-4% so the rate increases have not had a major impact on debt servicing costs. Combine this with the solid growth in wages over the past 2 years and household balance sheets remain healthy. Inflation should continue downwards but the path will be bumpy from here to the 2% Fed target. With high quality bonds providing a baseline return of 4-6% expecting equities to perform in the high single digits is not a stretch. Broadly diversified portfolios should be expected to perform in the mid to high single digits barring some sort of exogenous shock either to the up or downside. As I have written about before, however, the economy and markets are not linear but are driven by secondary and tertiary effects that often are interrelated. It's best not to get too caught up in all this and refer back to my original answer in the previous paragraph.
Personal Update: As you all know 2023 has been one hell of a year for me personally with the sudden and surprising end of my marriage and the passing of my mother from cancer. Safe to say I was hit by several 'unknown unknowns' and yet I am still here and have a lot to be thankful for. First and foremost are my children, who experienced these incredible shocks alongside me, and have proven remarkably resilient. Their strength has been inspirational to me and forced me to get up and move forward. The second is that you, my friends and clients, have not only stuck with me through trying times but provided so much support through your kind words and concern. No business owner could ask for better people to work with. Finally I am grateful that 2023 is over! 2024 is going to kick ass!!
As always please do not hesitate to text, email or call me if you have any questions or concerns. It is always a pleasure to hear from you.
Kind regards,
Sumit Kumar
Founder, Owner
Stone Lake Wealth Management, LLC
(203) 340-0251
Linkedin: www.linkedin.com/in/sumitkumar-SLWM
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Disclaimers:
1. Past performance does not guarantee future results.
2. Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed herein are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time without notification.
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Sumit Kumar, Greenwich CT