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U.S. Bias Has Demolished Retirement Accounts in 2022

By John Manganaro

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What You Need to Know

  • Around 41% of U.S. retirement accounts’ mutual fund investments are in funds focused on U.S. stocks, and another 40% is held in hybrid funds and bond funds.
  • Prior to 2022, this home bias had actually helped U.S. advisors in the recent past, because companies in the U.S. have delivered a good return.
  • But there is no free lunch in investing, and the same strategies that helped U.S. investors over the past decade are now harming them.

Investment advisors and asset managers agree that the current year-to-date period in the U.S. and global equity markets represents one of the most challenging times ever seen for the typical investor.

Asset managers say aggressive monetary tightening by the Federal Reserve being undertaken to address red-hot inflation will likely damage the U.S. economy and have an impact on the rest of the world. The widespread concerns about inflation and growth — and the real possibility of a global recession in late 2022 or early 2023 — has wiped trillions of dollars of value from both equity and bond markets, and sources agree more pain seems to be in store.

While market participants of all types are suffering, there is a special degree of discomfort being felt by retirement investors, says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. Early on Wednesday, Sonders tweeted out fresh data from the Investment Company Institute showing retirement plan assets have fallen further so far this year than ever before in a comparable period of time.

A big reason why, as Sonders and others point out, is that U.S. retirement investors carry a significant home bias on the equity and fixed income sides of their portfolios. So far in 2022, U.S. stocks, in particular, have been significant loss leaders, to the extent that some experts say the U.S. markets are actually substantially undervalued currently.

In fact, Dave Sekera, chief U.S. market strategist for Morningstar Research Services, wrote earlier this month that the global market appears “overly pessimistic” about long-term equity valuations, especially for U.S.-based companies.

“With equities selling off 24% year to date, it appears to us that the market has overcorrected to the downside,” Sekera says. “Equities have rarely traded at such a deep discount to their intrinsic valuation.”

Against this backdrop, Sonders’ Wednesday morning tweet sparked comments of commiseration and consternation from both big-name Wall Street professionals and Main Street investors alike. While some, like Sekera, see reason to think there are good buying opportunities today, there is still near uniform agreement that substantial and painful volatility is unlikely to abate any time soon.

For its part, the ICI data shows that, as of the end of the second quarter of 2022, around 41% of U.S. retirement accounts’ mutual fund investments were in funds focused on U.S. stocks. Another 40% was held in hybrid funds and bond funds, few of which have fared particularly well this year. Currently, Bloomberg’s U.S. Aggregate Equity Return Index is down 20%, while the Bloomberg U.S. Treasury Index is down 15%.

As Sonders’ tweet points out, there is “no place to hide” for the typical retirement investor.

“Most of this burden has been shouldered by those coming to retirement age,” she says.

Sadly, there is not much these investors can do but ride out the pain. As noted in an analysis published recently by SmartAsset, one option for those with fewer assets — or those who have otherwise not adequately prepared their investment portfolios for a sudden downturn — is to work longer. This can be a powerful option for those facing severe sequence of returns risk, but it is not always feasible or desirable, depending on the individual facts and circumstances facing a given investor.

Perhaps the method most directly in the control of any given retiree, as noted by SmartAsset, is the effort to cut down on living expenses in retirement. Cutting expenses won’t be easy for many, the analysis holds, but even fairly modest reductions in spending can make a big difference over time. In fact, according to SmartAsset, it may take as little as $250 or $500 in reduced monthly expenses to significantly extend the life of a given investor’s portfolio.

During a recent interview with ThinkAdvisor, Lara Reinhard, senior portfolio strategist at Janus Henderson Investors, said home equity bias was one of the major portfolio management issues she came across in her regular meetings with retirement-focused advisors.

“Advisors are like their clients in this respect,” Reinhard says. “They live here in the U.S., and they understand the companies and the market that exists here, and so they feel more comfortable investing here and owning the companies that operate here.”

This bias had actually helped U.S. advisors in the recent past, because companies in the U.S. have delivered a good return before 2022. But, as Reinhard says, there is no free lunch in investing, and the same strategies that helped U.S. investors over the past decade are now harming them.

(Image: Adobe Stock)

John Manganaro

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