2020-2022: A Stress-Test of Your Plan

January, 2023

Think back to December 2019. The economy was in high growth mode. Unemployment, interest rates, and inflation were at historically low levels. But what happened next?

  • A mysterious virus led to unprecedented governmental lockdowns worldwide, dropping U.S. S&P 500 stocks alone nearly 20% in value by the end of March 2020.1
  • Later in 2020 markets would rocket after scientists announced new vaccines and lockdowns were made less restrictive.
  • FAANG stocks soared in 2020… before giving up a lot of gains last year.2
  • Meme stocks shot way up in 2020… and then plunged in price last year.
  • Bitcoin and other cryptocurrencies reached record highs… and then crashed.
  • Inflation spiked to the highest levels most Americans ever experienced.3
  • U.S. bond markets collapsed, with the worst real returns in over a century.
  • U.S. stock markets during 2022 posted their worst returns since the 2008 crisis.4
  • Russia invaded Ukraine, triggering geopolitical turmoil and a humanitarian crisis.

I don’t know anyone who predicted more than a couple items. It’s the script of a bad movie. But what if a prophet forecast all this, and you believed it was from God? What would you change in your portfolio?

Next question: What if your guardian angel suddenly appeared, seeing your consternation, and also told you that, despite all that was coming, U.S. stock market would broadly return an average of 10% a year over those three years?5 Would you then have stayed systematically invested in the same diversified, allocated strategy from Professional Financial or similar advisory firms?

A yearly U.S. equity return of 10% is what happened! That’s very close to the stock market’s historical average over the past century.6 Those who maintained their investment planning strategy were rewarded.

A Balanced Look at 60/40 Strategies

Among the numerous memorable events in 2022 was the severe simultaneous decline of both fixed income and equity securities. The classic model 60% stock/40% bond balanced portfolio provided little to support the other asset category, leading some commentors to question the wisdom of this accepted institutional approach.

Although 2022 was the worst year on record for many bond indices, the performance of the 60/40 portfolio didn’t reach the top five peak-to-trough drawdowns that we see in close to a century’s worth of data.7 The drawdown that touched nearly 20% at its nadir was painful, but it’s only two-thirds of the 30% peak-to-trough drawdown investors endured through the recent but painful 2007–2009 period of the Global Financial Crisis.8

60/40 model portfolios recovered modestly late in the year, but still ended down about 14%. But in volatile times, you must focus not on where returns have been but rather on where they are expected to go. Recoveries of 60/40 model portfolios following a decline of 10% or more on average historically have shown strong performance in the subsequent one-, three-, and five-year periods (see Exhibit 1). Even more encouraging is that U.S. markets historically tend to perform unusually well the year following a mid-term election.9

Exhibit 1: A Case for Optimism

Performance of a 60/40 Balanced Portfolio following a market decline of 10% or more, January 1926 – December 2022

Exhibit 1 graph, Performance of a 60/40 Balanced Portfolio following a market decline of 10% or more, January 1926 –December 2022

Past performance is not a guarantee of future results. Portfolio is 60% U.S. S&P 500 stock index/40% 5-Year U.S. Treasury notes. Drawdowns include all periods where the 60/40 portfolio declined by 10% or more from the prior peak. Peaks are defined as months where the 60/40 portfolio’s cumulative return exceeds all prior monthly observations. Returns are calculated for the one-, three-, and five-year look-ahead periods beginning the month after the 10% decline threshold is exceeded. The bar chart shows the average cumulative returns for the one-, three-, and five-year periods post-decline. There are 10, nine, and nine observations for the one-, three-, and five-year look-ahead periods, respectively. Source: Morningstar Direct as of December 31, 2022. Five-year US Treasury notes data provided by Morningstar. S&P data provided by S&P Dow Jones Indices LLC. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Sticking with a Sound Plan

We can’t confidently predict where financial markets may be heading. Imagining a recovery when prices are falling, or when the media keeps talking about recession or when U. S. government debt reaches fantastic heights, is not easy. But evidence from a long historical view provides a basis to persevere even if a recession is ahead.

Recessions are always identified officially with a lag. The National Bureau of Economic Research (NBER) identifies phases of the business cycle using a bevy of indicators, such as consumption and income data, employment rates, and gross domestic product growth. None of these measures has been consistently dominant in the determination of economic conditions, and certainly past U.S. recessions have come in all shapes and sizes. Recessions are therefore named retroactively, with the benefit of hindsight (due to the necessary economic data that is only available with a lag).

We know that the two years following a business recession’s onset, equities have a track record of mostly positive performance. This is due to the forward-looking nature of well-functioning and regulated markets, highlighting how stock prices reflect market participants’ collective expectations as they continuously re-predict the future profitability of companies looking forward, not backward like most investors see things.

An evidence-based perspective makes a strong case for periodically rebalancing back to equity policy targets even in a recession. Few who sold stock positions to increase cash holding in times of trouble, such as the early 2000s dot-com crash, also had the courage to timely re-position back into equities and so benefit from the market recovery. Similarly, those who quit their plan and sold stocks due to media hysteria of the 2008–09 financial crisis, or in March of 2020 as sensational COVID fears spread. Few benefited from the subsequent market rallies, and maybe even incurred losses. Those staying invested recovered each time and very often gained more than they ever expected to see.

When prices of growth stocks are well off their record market highs, maintaining an informed and balanced portfolio is essential for achieving hoped for long-term outcomes. Surprising rebounds after fearful steep market declines allow disciplined investors who had the courage to rebalance, to capture far greater market returns than they might otherwise expect.

Markets Work

What do I mean by “markets work”? When news of the 2020 pandemic hit, markets quickly adjusted, reflected by declining stock prices. When uncertainty about the situation peaked in late March 2020, investors in effect were demanding a very high return in order to invest or to stay invested. Suddenly, news of a vaccine appeared and lockdowns could be expected to end and business to resume. Market expectations adjusted accordingly — prices rocketed. Short term swings can be wild. Those prone to making emotional changes in volatile times and quit their investing policy, are risking their wealth as well as their health and maybe their marriages.

In economic language, the firm’s cost of capital is your return. As prices decline, your expected return as a well-diversified equity investor goes up, not down. A smart investor should sensibly have a strategy to systematically buy, not to sell depressed equities in time of severe market distress.

It’s unrealistic to believe that anyone can reliably predict the future (and share it with you, of all people) or that you alone in the world can outguess market movements years or even months ahead. Having faith in an optimistic philosophy and a systematic investing approach backed by decades of trusted academic-level research is not only better than speculating, but also much more likely to work successfully.

Publicly traded markets can be trusted to do a good job capturing the collective human ingenuity across thousands of exchange-traded companies. The current price of a stock may be considered a “fair” estimate of it’s value. After all, no rational person would buy a stock expecting to lose money. Prices constantly reset in the market so that the expected return of a security is always positive. (That doesn’t mean, of course, the price is always right, and won’t decline more.)

Stress-Testing in Real Time

The past three years have been a stress test of whether you could stick with your financial plan. Your plan could have been formal if working with an advisor or informal. Still, take a moment to think about how well you managed. The next three years could be more uncertain, and markets could be wilder.

First, we recommend that you make sure that your investment plan is truly informed, and then that the plan’s implementation be based on financial science. Second, make sure the plan is designed for your own unique planning horizon and risk capacity. Even the greatest plan in theory is no good if you can’t stay disciplined or are unexpectedly forced to sell stocks when depressed due to losing your job, as an example.

Investors who spend too much time actively trading, research shows, are not just potentially missing out on expected returns — they’re usually stressed out, always worried about the latest news alert, and forced to decide whether they should take action now and then try to find time to do it. They eventually get worn out, and the excitement of trading eventually fades.


We have an approach that let’s you relax, and not worry — and focus on what really matters.

Financial planning and wealth management look at your complete wealth picture. A team of CFP® professionals bring together the different parts of your financial life to build a lifetime roadmap. We help you maximize your potential for meeting your deepest financial goals and dreams. We help families develop a sensible plan unique to their situation, that can give them confidence about their financial future even as the latest news of yet another market crisis terrifies others.

So, for those who are clients of our firm, remember how much your planning strategy with Professional Financial has helped you accomplish over the past three, five, ten, twenty and maybe more, years. As you examine your annual report, consider how far you have come with wealth planning that has reliably captured the benefits of capitalism around the world through financial markets over the years. We hope you can confidently continue to look forward to realizing a lifetime of goals and dreams.


  • 1 S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Decrease of 19.6% was from Jan. 1, 2020–March 31, 2020.
  • 2 Facebook-parent Meta, Amazon, Apple, Netflix, and Google-parent Alphabet.
  • 3 Gwynn Guilford, “U.S. Inflation Hit 7% in December, Fastest Pace Since 1982,” Wall Street Journal, January 12, 2022.
  • 4 Akane Otani, “Stocks Log Worst Year Since 2008,” Wall Street Journal (December 31, 2022), A1.
  • 5 U. S. Russell 3000 Index annual returns December 2019–November 2022.
  • 6 U. S. S&P 500 Index annual returns 1926–2021. S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
  • 7 The 60/40 portfolio consists of the S&P 500 Index (60%) and five-year US Treasury notes (40%). Five-year US Treasury notes data provided by Morningstar. S&P Dow Jones Indices LLC, a division of S&P Global.
  • 8 Peak-to-trough drawdowns include all periods where the 60/40 portfolio declined by 10% or more from the prior peak. Peaks are defined as months where the 60/40 portfolio’s cumulative return exceeds all prior monthly observations. Troughs are defined as the months where the 60/40 portfolio’s cumulative return losses from the prior peak are the largest.
  • 9 Paul Byron Hill, “Pre- and Post-Election Investing Considerations” (October 2022). Accessed at https://www.professionalfinancial.com/pfs/pre-and-post-election-investing-considerations/