What Did 2021 Teach Us About Investing?

In the wake of the unprecedented year 2020, we entered into 2021 with loose expectations, not sure what to expect. There were still so many uncertainties about where we were headed, how the markets would react, and what we’d be thinking right about now as we look back in retrospect.

Over the past two years, we have seen history through the creation and rollout of vaccines, inauguration of a new president, and even billionaires going to space. Was the Suez Canal blockage really only in March?

But in the midst of all this, we have found a few key investing principles that help our clients achieve long-term financial success.

Look Beyond the Headlines

Remember Meme stocks from earlier this year? AMC to the moon? It was a big year for fad investments, and those investing in “Meme stocks” or SPACs or NFTs or Crypto weren’t quiet about their involvement, either. All this noise made it a confusing time for many solo investors who wondered if they were missing out on the next big opportunity to build wealth.

But as we have seen in the past with other fad investments, overemphasizing the validity of headlines can entice you into chasing fads or gambling your wealth on your cousin Harry’s colorful investment suggestions. Just take a look at Bitcoin. A simple Tweet by Elon Musk had the power to send the value of the digital currency down thousands of points in a single day!

As we entered into 2021, in fact, it was predicted this year would be a stock picker’s market. A late rally by smaller and cheaper stocks in 2020, followed by the meme stock craze that took root in January, had some wondering, “Would active investors finally stage a comeback in 2022?” Unfortunately for them, the answer was “no.” Once again, professional stock pickers found themselves trailing behind the benchmark S&P 500 for another year in a row with some 85% of active U.S. stock funds on pace to underperform the S&P 500 this year as of Nov. 30, according to Morningstar Direct.

As scholarly research and historical precedent underscore, there’s no evidence to suggest that investors can reliably time the market due to skill or luck. Plus, missing only a few of the market's top days can significantly stifle a portfolio's growth by millions (or more) over the course of a lifetime! This was true before this year, and remains so going into 2022.

Discipline Is Key

In this time of global market upheaval due to the effects of the coronavirus pandemic, we have seen stocks take some swift and unexpected turns. At one point, economic shutdowns resulted in investor portfolio values dropping by as low as 30%. But, after the shortest bear market in history lasting only from February 2020 to April 2020, stocks rebounded in 2020 and 2021 to notch record highs for seven or more months in a row.

In times like these, especially, it’s no wonder investors are emotional. But, emotional decisions aren’t always the best ones. More often than not, remaining disciplined is the key to better investment returns.

Investors who respond to rumors within the marketplace and act on their fear often end up watching dips and rebounds (like that of 2020) from the sidelines as their former investments settle and start to climb again. In the aftermath of such emotional hijacking, some may attempt to regain former ground by rebuying those same investments, but unfortunately, that seldom happens. You see, more often than not, investors have already missed out on the market’s best days by the time they gain the courage to enter back in.

How much do investors sacrifice for losing out on the best days? J.P. Morgan has put an exact price to these missed days in its Guide to Retirement report. If you invested $10,000 into the S&P 500 on Jan. 3, 2000 and left it completely invested until Dec. 31, 2019, you would've received an average annual return of just over 6%. Your $10,000 would've grown to $32,421.

This 20-year period of time includes roughly 5,000 days during which the stock market was open. But as the table below shows, if you missed just the 10 best days out of those 5,000, you'd have less than half as much money as you started with. Miss more than 20 winning days, and you'd have lost money!

This phenomenon is not uncommon. It’s easy to get caught up in the media hype, purchasing investments at peak periods and selling during the downturn of the market cycle. However, remaining disciplined and staying the course is a much more viable long-term strategy. In practice, proper asset allocation and diversification still remains the key to keeping investment returns more balanced, allowing for the best possible scenario in your portfolio.

Control What You Can Control 

As we knock upon 2022’s door, there are still uncertainties hanging in the air. Next year will surely contain surprises, probably some good and bad. Fortunately, markets are poised to incorporate the new information as it develops, and we construct your portfolios to handle potential changes in the market that may arise from new information.

As financial advisors, we help investors develop plans they can stick with that meet their objectives and risk tolerance levels. While you can’t control what direction the market will go, you can hold a globally diversified portfolio tilted towards areas of the market with higher expected returns. You can also be mindful of expenses, turnover, and taxes that can eat away at the growth of your wealth. The wisdom of an experienced professional can develop a comprehensive plan that accounts for what is both relevant and manageable.  

So, as you move into this season of transformation and change, try not to get carried away with reading a crystal ball. Adopting a long-term perspective supported by evidence rather than emotion can provide a better investment experience.

Written by Robin Young in collaboration with Lexicon Content Development