Year-end is usually a great time for reflection and review of the last twelve months, but the end of 2022 signifies a major milestone for me personally and this business as the end of the 10th full year of my practice here at Bason. Ten year is a good chunk of time and a great deal has happened over that period. In 2012, investors were still shaking off the impacts of the financial crisis, and certainly no one was dreaming about getting rich quick by investing in fake internet money. In 2012 Google was still Google (not Alphabet) and Facebook was still Facebook (not Meta). In 10 years we’ve seen oil prices round-trip from over $100 to under $30 to over $75 to under $20 and back. Natural resource companies have gone from being the largest in the world to small-cap value stocks. Interest rates started low in 2012, went lower and skyrocketed up in 2022.
More significant are the myriad of things that have not changed. We still can’t predict the future. No one is making accurate 12-month forecasts about S&P500 levels or foreseeing the impact of the next global economic crisis. Everyone still is at risk of FOMO in markets, whether it’s an allocation to Bitcoin or emerging markets or if they should buy the Tesla dip. Everyone’s neighbor/brother-in-law/dentist got it exactly right last time and is more than happy to tell you about it.
Markets still go up, then down, then back up. Over the last decade we’ve seen it happen quickly (hello, COVID scare) and more slowly as in 2015. The narrative changes each time (SARS, Putin, COVID, inflation) and the results are still the same – the world hasn’t ended and investors with patience get rewarded. Markets rotate – sometimes the thing in vogue is energy, sometimes it’s tech, sometimes it’s Bitcoin, sometimes it’s TIPS. If you think you know which way the rotation leads next, you (and thousands of other investors) are delusional. Sometimes it is really hard to be well diversified, like when the S&P 500 beats every other asset class year after year for 5+ years. Sometimes it is a lot easier, like in the last year when small cap value stocks in the US and abroad have finally had a moment. Sometimes big risky bets on interest rates pay off (Fall ’18 – Spring ’20) and sometimes those bets get murdered (2022). Sometimes you refinance your house and 18 months later you get a better rate in a money market than you just locked in for 30 years! Markets remain predictably unpredictable. People’s behavior as investors remains fairly predictable. Your performance as an investor still has everything to do with understanding those two facts.
On a more personal level, I’m thrilled with the last tens years of this business. I had an idea of what I wanted this firm to be when I started, and I’ve found it. I wanted a small practice with clients I knew well and enjoyed, and I’ve been very fortunate to have those things today. The company name isn’t on any buildings or too many industry lists anywhere. I’ve all but disappeared from any social media and web marketing as we have reached our full capacity and struggled to make room for referrals. I look forward to client meetings and am glad to see names on the caller ID. Of all we’ve seen in the last decade, I am first and foremost thankful for great client relationships and hope that I can say the same thing in another 10 years.
My advice this round is simple: zoom out. If you need to, pull your performance reports from the last several years and note those gains. Recognize that this year we’re giving back some of those past gains. Pay attention to past years that you’ve had losses, and how quickly you minimize those in hindsight. The current time always feels bad, but not many of us are fixated on the temporary losses in 2020 or late 2018 or late 2015 (should I go on?).
Now, back to our regularly scheduled programming. The fourth quarter was a relief for investors as stock and bond markets saw some recovery from the onslaught earlier in the year. US and international stocks bounced back, with international stocks leading the way with large double digit gains in the quarter. For the year, value stocks handily outperformed their growth counterparts in both large and small cap US markets.
| 4Q 2022 | 1 Year | 3 Year | 5 Year | |
| Large Cap US Stocks | 7.56% | -18.11% | 7.66% | 9.42% |
| Small Cap US Stocks | 6.23% | -20.44% | 3.10% | 4.13 |
| International Equity | 17.34% | -14.45% | 0.87% | 1.54% |
| EM Equity | 9.70% | -20.09% | -2.69% | -1.40% |
| Aggregate Bonds | 1.64% | -12.03% | -2.35% | 0.16% |
Index performance is provided as a benchmark. It is not illustrative of any particular investment. An investment cannot be made in an index. Past performance is not an indication of future of results. S&P 500, Russell 2000 Index, MSCI EAFE Index, MSCI EM Index, S&P US Agg Bond Index. Returns as of 12/30/2022.
Tax & Policy Updates
In late December, Congress passed a major omnibus spending bill and included in this package was the SECURE 2.0 Act, a major expansion and revision of tax and retirement savings law, programs and products. Thursday the 29th President Biden signed the spending bill, putting Secure 2.0 into law. Nearly every aspect of tax-advantaged savings was touched in some way by this bill, along with college savings plans and charitable giving rules. The SECURE 2.0 legislation is sweeping and I am only going to focus on those issues I think will affect clients most directly. Note that there are also changes to small business retirement plans, including SIMPLE and SEP IRAs.
A follow on from the SECURE act of 2019, SECURE 2.0 affects retirement ages, savings contributions, required distributions, company contributions and more.
- The beginning age for Required Minimum distributions has moved again from 72 to 73, with an eventual move to 75 for those born in 1959 or later (in 2033). Oddly, no one will take their first RMD in 2023 because of these changes! If you were expecting your first RMD in 2023 (born in 1951), your first RMD is now 2024. If you took an RMD in 2022, you will do so again in 2023.
- Roth RMD requirements for company-sponsored retirement plans (401(k)/403(b) plans) will be eliminated in 2024, matching treatment of Roth IRAs.
- Qualified Charitable Distribution limits will jump to $200,000/year.
- SEP and SIMPLE IRAs will now have a Roth option.
- For the first time, employer contributions to retirement plans will now have the option to be treated as Roth contributions. This means that these contributions would be immediately taxable to plan participants, unlike in the past when ALL company contributions were pre-tax. Note that this is an option only.
- Retirement plan catch-up contribution limits are changing. IRA catch-up contributions (currently $1,000/yr) will now be indexed to inflation.
- 401(k) catch-up contribution limits will jump to $10,000 per year for workers aged 60-63.
- Catch-up contributions to company plans after 2024 will be required to be Roth contributions for high income earners (over $145,000/yr).
- All new 401(k) plans must include automatic enrollment of 3%, with gradual increases to 10%.
- A myriad of changes were made to make retirement savings more accessible without penalties, including for victims of domestic abuse, natural disasters, terminal illness and a general “emergency withdrawal” which is limited to only $1,000.
- In case none of this was enough complexity, we also get NEW RETIREMENT ACCOUNT TYPES! These include an “Emergency Savings Account,” a Roth-like vehicle limited to $2,500 that can be matched with employer funds. There is also a new “Starter 401(k)” plan for small businesses, which is basically a 401(k) plan with no employer match and with automatic enrollment, with contributions limited to IRA contribution limits.
- Individual 401(k) plans (aka Solo 401(k)) can now be established and funded with employee deferrals up to an individual’s filing deadline, moved back from a calendar-year-end date prior.
- The biggest change to education savings is that SOME leftover balances in SOME 529 plans will be allowed to be rolled over tax and penalty free into a Roth IRA for the same beneficiary. The 529 plan must have been open for at least 15 years, the annual transfer cannot be more than a regular IRA contribution ($6,000 now) and there is a lifetime cap of $35,000, and contributions made in the last 5 years are not eligible. This is a real opportunity for anyone who has over-saved for college and has “leftover” 529 money, but has complexities as you can see.
Bason Asset Management 