What 2023 Taught Us About Investment Strategies, and What to Expect in 2024

2023 is officially behind us, and it is always helpful to look back at what worked throughout the year in order to position your portfolios for another successful trip around the sun. You’ll want to do this for taxes but also for income and investment performance as well.

READ: How to Invest in 2024 — Insights from Wealth Managers and Stock Market Experts

2023

To beat the S&P 500 Index in 2023 you had to own either all the Magnificent 7 technology/AI companies (Alphabet, Amazon, Apple, Microsoft, Meta, Nvidia, and Telsa) or significantly overweight 3-4 of them. On the bond side of the ledger, you wanted to keep your duration or interest rate risk very short. The best option this year in the bond market was owning treasury bills. With bills you received higher rates of interest, got your money back quickly, and didn’t take on any credit risk. Two simple investment strategies.

However, after the massive sell-off in the NASDAQ and tech stocks in 2022, you might have been gun shy to just own the Magnificent 7. Since the Total Bond Market Index lost 13.1% last year, you might have been tempted to extend the duration on your bond portfolio to pick up more yield. The problem with that strategy was the Federal Reserve hadn’t finished raising interest rates and because of that, longer-term bonds lost money for a third year in a row. The good news, 2024 could be the year to be more diversified and extend the duration on your bond portfolios.

READ: Diversify Your Portfolio — Beyond AI Stocks

2024

Stocks

Since only owning 7 tech/AI stocks in a portfolio isn’t prudent from a diversification perspective, 2024 could be the year to spread out your bets in other sectors of the market that are cheaper relative to the Magnificent 7. One strategy could be to buy dividend-paying stocks. This group of companies could start to benefit from the Federal Reserve being on hold and really pay off if interest rates get cut next year.

Higher interest rates on CDs, money market funds and treasury bills were stiff competition for dividend-paying stocks this year. Aside from the technology and communication sectors, most S&P 500 stocks significantly underperformed. Consumer staples, financials, energy, utility and industrial stocks pay generous dividends and trade at much more reasonable price-earnings ratios.

Bonds

The total bond market index has now produced negative returns for 3 years in a row, which has never happened before. This has been particularly painful if investors owned bond funds because they didn’t get their money back like owners of individual bonds when their bonds matured. They also paid higher fees.

Investors have several ways to play the bond market in 2024. They can stay short by just buying treasury bills which mature in less than a year. You buy these bills at a slight discount to par and when they mature you get the face amount. For example, you pay $98 but get $100 when the bills mature. The other great thing about bills is they pay a 1% higher interest than a 10-year treasury bond today.

The investment risk is if the Federal Reserve aggressively cuts short-term rates next year because inflation hits their 2% target, or we have a recession. In either of these scenarios, when your bills mature you would most likely be reinvesting at a lower interest rate. If you buy bonds that mature past a year your bonds will appreciate if rates fall next year. Intermediate Corporate bonds pay much higher rates of interest than treasury bonds, so they might be a good option, too. Recently, for my clients, I have doubled their duration or interest rate risk by buying the 2-year treasury bond yielding 5%.

The bottom line

Making money in either the stock or the bond markets in 2023 wasn’t easy. You had to own just the right 7 stocks and keep the duration on your bond portfolio very short. Not many investors did, either. The good news, what worked well this year is no guarantee it will work as well in 2024.

In fact, odds favor doing something a tad different, particularly with the Federal Reserve seemingly on hold, inflation coming down, and bond yields at all-time highs. Ask your advisor about investing in dividend paying stocks and treasury or corporate bonds that mature in 5-7 years. You might be pleasantly surprised at this time next year.

Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information.