Here is a recap of market performance for the month of December and 2021 overall:
After a down month in November, investment returns rebounded in December. International stocks performed best, while US large cap and small cap stocks also had strong months. Bonds slightly declined. In 2021, investors were rewarded for owning stocks. All three stock categories increased by double digits. Bonds had a rather uneventful year and detracted from returns. But overall, for most investors with a diversified portfolio, 2021 was a positive year.
So what’s coming in 2022?
It’s tough to make predictions, especially about the future.
Yogi Berra – baseball player, manager
Looking back to prior years can be helpful when attempting to forecast what may happen next year. Going into 2020, not many people predicted that we were on the doorstep of a global pandemic. And at the beginning of 2021, just as vaccine rollouts were beginning, not many predicted that a year later, new variants of coronavirus would still be impacting our lives and the global economy.
Not knowing the future is something investors must grapple with. The good news is that we can still make prudent, thoughtful, informed investing decisions without knowing for sure what tomorrow will bring.
The chart below from JP Morgan shows different asset class returns annually since 2006, as well as the returns of a diversified, asset allocation portfolio:
Here are two key takeaways from this chart:
1) Diversification is both challenging and beneficial. The advantage of diversification is obvious – portfolio returns tend to be much smoother than individual asset class returns. Owning some of everything reduces the probability of a very bad year. This is crucial. Most people need to stay invested for decades, which means longevity is essential. You have to stay in the game to make the returns necessary to achieve your goals.
The challenge is accepting that asset class returns are somewhat random and severely unlike each other:
On average, over the past 16 years, the best asset has beaten the worst asset by almost 37% per year! On one hand, that’s typical of markets. On the other, it can be challenging to stay invested in assets that aren’t currently benefitting the portfolio. It takes discipline to continue to hold them and patiently wait for them to contribute. On average, over the past 16 years, the best asset has beaten the worst asset by almost 37% per year! On one hand, that’s typical of markets. On the other, it can be challenging to stay invested in assets that aren’t currently benefitting the portfolio. It takes discipline to continue to hold them and patiently wait for them to contribute.
2) Evaluate your level of cash. Over the 16-year period, cash returned only 0.8% annually, which is less than the inflation rate. While cash doesn’t fluctuate in value over the short term, it is typically not an efficient asset to hold for long periods of time. While a certain level of cash reserves is prudent and necessary, too much cash drags down your long-term returns. Paying down debt, investing in a fixed annuity, CD, fixed income, or stocks can all be sensible alternatives to cash depending on your financial circumstances and goals.
We look forward to working with you this year – helping you to make smart financial decisions and achieve your goals. Happy New Year!
