Q4 Client Note – A Good Year for Stocks, If Nothing Else

For the second consecutive year the US stock market posted an extraordinary gain. This, in the midst of a once-in-a-century pandemic. The S & P 500 (Total Return) index was up 28.71% for the year, including a 11.2% increase in the fourth quarter. On top of the utterly surprising 18.4% increase in 2020.

Other asset classes generally performed well in 2021. Global real estate gained 31.38%, International Developed Markets gained 12.62%. And commodities were up 27.11%. Emerging market equities were the exception, however, falling 2.54%

Bonds were another story. Fueled by generationally strong inflation, caused by pandemic related supply/demand imbalances, together with the prospect of near certain tightening by the Fed in 2022, the Bloomberg US Aggregate Bond Index lost 1.54% for the year

Included here, as usual, are all the details from our friends at Dimensional Funds in their Quarterly Market Review and Annual Market Review. In other good news, Dimensional has lowered fees on a good number of their funds.

I really like the graphics produced by Visual Capitalist. Here is their 2021 performance review.

Reversion to the Meme? Please, No. But, Likely Reversion to the Mean.

Fueled by social media provocateurs, so-called meme stocks were all the rage in 2021, especially at the beginning of the year. Names like Game Stop, AMC and, lately, Bed, Bath and Beyond.

This kind of “investing” is the rankest and most dangerous form of speculation. Prices bounce around like a yoyo and don’t do any of us any good. Don’t do that!

 The Year Ahead. Just as it looked like the pandemic may have been coming to an end, we were blindsided by Omicron. This will surely affect the economy for the first part of 2022, but is expected recede as we get further into the year.

Following such extraordinary returns over the past two years, amid continued uncertainty, and with several interest rate increases by the Fed on the horizon, it is likely that the markets in 2022 will be facing headwinds. It may be well worth tamping down your expectations.

The Decade Ahead. That said, I’m not a big believer in forecasting (especially the short-term variety) as a useful planning and investment tool. First, professional prognostications are notoriously bad. More importantly, principled planning is a far better route to achieving investment success.

And part of that planning, on some level, includes the necessary evil of making some assumptions for intermediate to long term planning purposes, to come up with reasonable saving and spending goals.

On that score, Vanguard (whom I consider reasonably trustworthy) publishes an annual economic and market outlook; including their capital market assumptions for the ensuing ten years. This year’s version provides a sobering look at expectations for the next decade. With prices and valuations at year end hovering around record highs, their analysts predict both substantially lower stock returns than in the last decade (3.3% for US equities) and bond returns (around 2%) due to low interest rates. And concludes: Returns on a 60/40 balanced portfolio are expected to be roughly half of what investors realized over the last decade.

That is a quite conceivable possibility and well worth taking into account in your planning.

4% Rule? 3.3% Rule? Golden Rule?

A stock peak isn’t necessarily a cliff. But what are the implications of these lower expected returns for retirees? You’re probably going to have to spend a bit less from your portfolio to ensure its longevity.

You’ve likely heard of the 4% rule. Of course, it’s not a “rule” at all. But a guideline discovered by financial planning researcher Bill Bengen. Bengen found that if you have a balanced portfolio, you can start with a 4% withdrawal amount, increase that by inflation each year and it is very likely your portfolio will survive for 30 years.

In recent follow up research by Morningstar, it is asserted that due to lower expected returns, we might have to reduce that starting amount to 3.3% and/or implement a less monotonic and more flexible withdrawal strategy. It’s a good read.

Focus on Priorities

There are many enduring lessons from Covid and volatile markets:

One is that it’s absolutely critical to have a plan in place that is strongly tethered to you values and goals and that is designed to withstand the inevitable vicissitudes of life. And having the discipline to stick to it.

Finally, the uncertainty and stress of Covid has compelled all of us to reexamine our priorities in life. The last couple of years has been an emotional rollercoaster. Many people are seriously considering what is best for their careers. Money is just a tool. Think carefully about what you are working and saving for and what you are spending on. You well be well rewarded for that.


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