Stock Market Gains in 2023
The stock market had a great year in 2023, with positive returns for most investors. However, it’s important to note that these gains have not fully made up for the losses experienced in 2022. When factoring in dividends, the S&P 500 returned 3.42% over the two-year period, but inflation has eroded those gains.
Investors faced a challenging year in 2022, with simultaneous declines in both the stock and bond markets. This made it one of the worst years for investors, even worse than the financial crisis in 2008. Bonds declined sharply as interest rates rose, whereas during the financial crisis, investment-grade bonds performed well as interest rates declined.
Fortunately, the markets have been more favorable recently, with stocks and bonds holding their own.
Good Returns for Investors
The final quarter of 2023 saw exceptional performance in the stock market. The S&P 500 rose by 11.2% during this period and had a total return of 11.7% including dividends. For the year, it gained 24.2% and returned 26.3%, including dividends.
Broader U.S. stock indexes also had a total return of around 26% for 2023. Rank-and-file fund investors shared in most of these gains, although actively managed funds generally lagged behind low-cost index funds that seek to mirror the markets.
Global markets also performed well in 2023, with the MSCI All Country World Index returning over 21%. However, average international funds trailed behind these market returns.
Individual Stock Performance
While most stocks underperformed the averages, there were some standout performers. Stocks like Nvidia and Meta (Facebook’s parent company) experienced significant gains in 2023. Cruise lines such as Royal Caribbean and Carnival also saw their stocks surge.
However, stock picking and market timing can be challenging and time-consuming. It’s often better to seek average market returns through low-cost index funds.
Bond Market Challenges
The bond market faced its own challenges in 2023. Many investors who held bond funds since the start of 2022 have not yet recovered their losses. Bond prices fell as interest rates rose in 2022, resulting in declines for bond funds.
In 2023, there was some improvement, with the Bloomberg U.S. Aggregate Bond index returning 5.5% for the year. However, the losses from the previous year were still significant, and longer-duration bonds performed even worse.
What’s Next for Investors?
Interest rates, inflation, and the strength of the economy are crucial factors for both stocks and bonds. However, it’s impossible to predict these accurately for long-term investing success.
Historically, the S&P 500 has had an average annual return of 10.4%, demonstrating the market’s long-term upward trajectory. While future returns are uncertain and not guaranteed, a long-term, low-cost, buy-and-hold strategy has provided handsome returns for investors who can tolerate market volatility.
For older investors with shorter investment horizons, it may be more prudent to lock in returns at current interest rates rather than taking a long-term approach. Regardless of your investing horizon, it’s important to set up your portfolio to withstand market fluctuations and be prepared for potential trouble in the future.
Hot Take: Navigating Stock Market Volatility
While the stock market has seen positive returns in recent years, it’s important to remain cautious and prepared for potential downturns. Investing in low-cost index funds can help you achieve average market returns without the challenges of stock picking and market timing. Remember to set up your portfolio to withstand market volatility and be ready for potential trouble in the future. Enjoy the better times in the markets but stay prudent in your investment decisions.
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