In the words of Frank Sinatra: "It Was a Very Good Year" – Listen Here.
2022 Was Bad!
2022 marked one of the most challenging years for financial markets in the last century. After such a year, there are typically two possible outcomes: a bounce-back recovery or continued downturn. Fortunately, 2023 followed the first path and delivered a strong recovery. Read our 2022 review here.
2023 Was Great!
Heading into 2023, many investors were concerned about inflation and the possibility of a recession. However, the economy remained resilient - especially in the U.S. - despite the Federal Reserve raising interest rates multiple times. If you had invested in a Global Equity Index fund, which typically holds around 60% of its equity in the U.S., you likely experienced some volatility but ultimately saw significant gains by year-end.
2023 was a great year for nearly all asset classes, especially in Q4, when U.S. stocks surged and helped drive the broader market to top-quartile performance. For most investors, it marked a much-needed recovery in both stocks and bonds after a difficult 2022. Read our 2023 review here.
2024 Was Better Than 2023!
While many investors entered 2024 believing the markets were overpriced and expensive, which would ultimately lead to a rebalancing lower or potentially a market crash... the year defied expectations, with most asset classes reaching or approaching all-time highs:
US stocks extended a bull market, with the S&P 500 gaining 27% in 2024—topping the 19% gains achieved in 2023.
Global stocks returned 20%.
Gold returned 27% in 2024, and commodities returned 18%.
Property prices were up nearly 4%. Cash in the bank could have returned around 5%.
Vanguard Index Funds and Bond Performance
The one disappointment came from Global Bonds, which delivered a modest 2% return. As a result, the traditional 60/40 portfolio (60% equities, 40% bonds) returned 10%, while the conservative portfolio Lifestrategy 20 saw a return of just 3%.
Some argue that this signals the death of diversification, but we at Grad Rags disagree. The purpose of diversification is to cushion the impact of poor performance in one asset class by benefiting from better performance in another. Bonds may have struggled recently, but stocks more than made up for it.
In the future, there will undoubtedly be times when stocks underperform and bonds carry the load.
U.S. Stock Market Rules
American financial blogger ‘A Wealth of Common Sense’ summarised 2024 as follows:
"One of the reasons it was a good year for the stock market is because it was a good year for the economy. The U.S. inflation rate averaged 3% for the year. The unemployment rate came in at an average of 4% in 2024. Real GDP growth was roughly 3% annualized in the 2nd and 3rd quarters. 2024 was a wonderful year for stocks and the economy".
Was 2024 Really a Good Year for Everyone?
In a recent blog, The Rich Get Richer: Another Reason Why the UK Housing Market Has Not Crashed Yet, we explored how growing wealth inequality is contributing to the cost-of-living crisis in the UK. This theory was introduced by Gary Stevenson (known as GarysEconomics on YouTube), a former interest rate trader and inequality campaigner based in London.
Gary's latest thoughts on the UK economy moving into 2025 shed light on an important issue: While asset prices (stocks, gold, and real estate) have reached record highs, living standards for ordinary people continue to decline. This disparity underscores a broader issue of inequality, where the wealthy are seeing significant gains, while the rest of society faces economic challenges:
"Everything is at an all-time high. Most major stock markets are at or near their all-time highs in terms of price. The gold price is at or near its all-time high. House prices are shooting up to new all-time highs.
And I think it's important to talk about that because what we see on the news and what most of us understand about the economy is that living standards have really failed to recover and they continue to slide, and that gives the impression of a very weak economy - and I do think we have a very weak economy.
But what is often not spoken about is this fact that if you're looking at the economy from the perspective of the asset holders, which is basically from the perspective of the rich, things are really, really, really, really good. Everything is at massive all-time highs.
So you're going to see the rich people seeing continued increase in their wealth. They're doing the best they've ever done. And I think this basically underlines the point which I've been making for a long time, which is this is not an economic crisis for everyone. This is a crisis of inequality.
But I think what is probably most interesting, that is different about the economy now compared to last year, (last year) inflation was still just above 4% in this country and there was still this kind of perception that we were living in a very weak economy because we were still in the economic aftermath of Covid, and there was still this perception that we're screwed at the moment because Covid was really bad, because of the Russia-Ukraine war, but we're going to come through that and things would be better.
And yet here we are a year later and we’ve started to see pretty much everything normalise. Inflation is pretty much back down to around target in most countries. Commodity prices, which went up in the war in Ukraine, most of those are back down to the same levels they were before the war in Ukraine. Interest rates are starting to come back down again. Unemployment is at normal levels. GDP is back higher than it was before Covid.
And yet, despite the fact that everything has kind of normalised, living standards for ordinary people are still significantly worse.
I think this underlines the thing I've been saying for a long time…the reason for the fall in living conditions is not about supply chain problems during Covid, or about the aftermath of the Ukraine war. What we are seeing is a permanent decrease in living standards because we had a permanent increase in inequality".
Taxation is Failing
One of the key factors driving this inequality is the current taxation system. Taxation is meant to fund public services and infrastructure such as education, healthcare, and defence, but taxation should also play a role in redistributing wealth to reduce inequality. By taxing individuals and businesses at varying rates, especially progressive taxes, governments can redistribute wealth to reduce economic inequality and fund social programs for the disadvantaged.
However, as we have seen with the millionaire ex-Prime Minister Rishi Sunak’s tax returns, this is not happening in the UK today:
Mr Sunaks tax return shows that he enjoyed an income of £2.2 Million a year on which he paid tax at just 23% – not the 40% you may have assumed.
Why? Because Mr Sunak gets most of his income in the form of investment income, and taxes on investment income are much lower than taxes on wages.
In the UK, investment income has now soared to about £80 Billion a year, and around 60% of that money goes to the richest 10% of the country who benefit from lower tax rates, which then contributes to further income inequality.
Meanwhile, most individuals in the UK hold the majority of their wealth in cash, with little or no exposure to investments outside of their pension. This is because they either distrust investing or do not understand the potential returns from investing ie an 18% return from a global index fund in 2024 compared to 5% from a savings account. This further adds to the inequality in UK society.
The Sovereign Individual
The book ‘The Sovereign Individual’, published way back in 1997, predicted the impact of technology and the digital revolution on society in the current decade. The authors argue that the traditional nation-state will lose power due to globalisation and advances in information technology, particularly the internet.
The book predicts that this shift will lead to an era which will create new forms of wealth, power structures, and inequality, including the breakdown of traditional social contracts and the rise of global elites. Here is a quote from Chapter 1:
"The clash between the new and the old will shape the early years of the new millennium. We expect it to be a time of great danger and great reward, and a time of much-diminished civility in some realms and unprecedented scope in others.
Increasingly autonomous individuals and bankrupt, desperate governments will confront one another across a new divide.
All nation-states face bankruptcy and the rapid erosion of their authority. Mighty as they are, the power they retain is to obliterate, not to command. Their intercontinental missiles and aircraft carriers are already artefacts, as imposing and useless as the last warhorse of feudalism.
When the state finds itself unable to meet its committed expenditure by raising tax revenues, it will resort to other, more desperate measures.
Among them is printing money. Governments have grown used to enjoying a monopoly over currency that they could depreciate at will. This arbitrary inflation has been a prominent feature of the monetary policy of all twentieth-century states.
The US dollar lost 84% of its value between 1949 and 1995. This inflation had the same effect as a tax on all who hold the currency. As we explore later, inflation as a revenue option will be largely foreclosed by the emergence of cybermoney.
In the Information Age, individuals will be able to use cybercurrencies and thus declare their monetary independence".
What next in 2025?
When you are planning for 2025, ambitions and hopes are great, but realism is essential. You have to know where you are at with your finances. If you have never written it out in detail before, it’s good to just write down what your income is, what your debts are, and your expenses.
Now more than ever you must try to keep control of your spending: enjoy life by spending intentionally and avoiding lifestyle creep. Spend less than you earn, set up a simple budget, and pay yourself first automatically. You can find blogs on Grad Rags to Riches which will help focus your attention.
To increase your wealth you need to buy like the rich. The rich buy assets which appreciate in value like equity, and property. Forget trying to play the market, listening to the experts, and following the so-called trends.
Invest in low-cost diversified global index funds, set up your monthly direct debit into your L/ISA and Pension to enjoy great tax breaks, then switch off your laptop and go and enjoy life. Leave the magic box to do its thing over the long term ie make you WEALTHY!
Investing is a long-term game.
Buy low, sell high.
Be greedy when others are fearful.
Buy and Hold
Time in the market not timing the market
Comments