2022 is rapidly coming to a close. It's hard to believe Christmas is less than a week away. For investors, however, the end of the year can not arrive fast enough.
The past 12 months have battered portfolios and 2022 will go down as one of the worst investment years in recent memory. With only a few trading sessions left in the year, the Nasdaq is down more than 30% so far in 2022. Meanwhile, the Russell 2000 is off more than 20% and the S&P 500 has fared only slightly better.
Bonds have been no safe haven for investors either. Rising interest rates have made the other component in the ideal 60/40 portfolio a loser in 2022.
The alternative space has been even worse.
Bitcoin, which started the year at over $45,000, now is under $17,000 and FTX is turning out to be the biggest fraud since Bernie Madoff. Fortunately, I never invested a dime in the cryptocurrency markets, even as the underlying blockchain technology is intriguing and has many potential uses. There are too many instruments in this space and over the longer term I think major central banks will all introduce their own digital currencies.
I would like to say I am confident equities will rebound early in 2023, but I have no conviction in that statement. Inflation levels are still exceedingly high, the economy looks headed towards some sort of recession in the first half of 2023 and a Fed "pivot" still seems some time off.
As for my "alternative" investments, my regular Real Money readers know most of my holdings have been held via covered call positions throughout 2022. While this simple risk-mitigating option strategy has not prevented my portfolio from being in the red this year, it has easily outperformed the major indexes thanks to its extensive use throughout my portfolio.
I am also in the process of selling my loft in Delray Beach, Florida. Thanks to the influx of northeasterners in this neck of the woods since the pandemic, real estate in my area has appreciated some 50% to 60% over the past two years. This piece of property has turned out to be tremendous investment, consistently yielding some $2,000 a month in rent above my carrying costs.
I am certainly not expecting to find anything close to that opportunity as I redeploy those profits with the average 30-year mortgage rate currently above 6%, more than twice my current mortgage rate. The key here will be discipline and a focus on free cash flow. I will not consider any property where rent does not at least cover all-in monthly carrying costs at current mortgage rates.
I believe that if I can make a slight gain with a 6.5% mortgage rate, the investment will be more than acceptably profitable when I refinance at lower rates in a year or two. Given my view the economy is heading right into recession, that refinancing scenario seems likely.
I also figure if I cannot find any suitable property replacement, I can always park the money in a one-year Treasury bill yielding north of 4 1/2% currently. After a decade and a half of ultra-low interest rates that brutally punished savers, this risk-free investment has become a true "alternative" to equities and one that might beat stock market returns in 2023, I hate to say.