Here’s a question: Why does your car need a rearview mirror? Once you’re moving forward, does it really matter what lies behind you?
I think we can all agree, whether you’re cruising along in a well-worn family sedan or the latest, nearly self-driving Tesla, a 360-degree view is helpful, even if it’s hard to explain exactly why. In similar fashion, it can be valuable to scan each passing year for important investment lessons.
What are some of the key investment insights from 2021? With a new president, continued COVID outbreaks, and a surge in inflation, the year started and finished with plenty of uncertainty. And yet, financial markets seemed to whistle past it all. As such, many of the same lessons we’ve emphasized in the past remain as relevant as ever.
Lesson #1: Markets Are Forward-Looking … You Should Be Too
By studying returns across markets and over time, many of the principles guiding our investment approach become clear. Because markets are forward-looking, however, last year’s performance tells us very little about what to expect this year.
Consider the impressive performance of the U.S. stock market, up 26% in 2021. But did you know the U.S. was only the 9th best-performing global stock market in 2021? The Czech Republic took 1st place, with a stunning +53% return for the year. The prior year, however, stocks in the Czech Republic ranked near the bottom, down nearly 4%.
In similar fashion, real estate investment trusts (REITs) were the best-performing global asset class in 2021, with a +31% return; the year prior, they were the worst-performing asset class, down –10%.
Ditto for stocks in the U.S. energy sector, up +60% in 2021. This was a dramatic change from 2020, when energy stocks fell nearly –40%.
Why do markets regularly exhibit such mercurial results? As we’ve covered before, today’s prices are driven by the market’s collective expectations about the future and only change when new information comes to light. New information is, by definition, unpredictable. Perhaps even more unpredictable is investors’ collective response to that new information.
Lesson #2: Don’t Chase Shiny Objects
Remember the GameStop and AMC Entertainment stock-trading frenzies? How about SPACs? Last year included these fads and an abundance of other shiny objects.
The challenge with chasing fads, of course, is the need to nail the timing, not just once, but twice—when you buy and when you sell. For example, in February 2021 alone, GameStop was down 90% peak-to-trough. A select few won the game by selling near the peak, but more players piled in too late, paying dearly for buying high, selling only after prices plunged.
Similarly, it was hard to open a newspaper or turn on the TV without hearing about SPACs, or special purpose acquisition companies. Promoted as a better way for businesses to go public—and interpreted by novice investors as a sure way to easy riches—interest in SPACs seemed to also reach a fever pitch last February. For the remainder of the year, however, an index of SPAC investments fell –9% while the U.S. total stock market gained 20%.
As Warren Buffett has observed, “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is.”
Indeed, it’s hard to buy popular, shiny objects and do well.
Lesson #3: Don’t Fear Market Highs
The remarkably strong returns of the U.S. stock market represented its third year in a row of double-digit annual returns. The S&P 500 Index closed at new record highs 75 times throughout the year. As our friends at Dimensional Fund Advisors wrote, “breaking records sound[ed] like a broken record.”
Rather than celebrating the strong returns, some investors may worry U.S. stocks are overdue for a correction. Volatility and price drops over the past few weeks have only increased these fears. But, it’s important to remember stock prices don’t adhere to the laws of gravity—as in, what goes up, must come down.
Instead, decades of financial economic inquiry and experience tell us markets will randomly rise and fall over the near term, but they must grow over time. Even after a new market high, subsequent returns are similar to historical average returns. There’s just no sense in changing a prudent long-term strategy just because of the short-term environment.
When those inevitable downturns do occur, it’s better to buckle up than bail out.
Vista’s Take on 2021: Diversification Remains Our Guide
Speaking of broken records, our advice for 2022 will sound quite familiar to anyone who has listened to us for long. This is intentional. The most important investment lessons bear repeating.
As investors, we can reference past returns, viewing them like mile markers to suggest the progress we’ve made so far. But we can’t change the past, so there’s no sense chasing after giddy trends others have already popularized with high prices.
As we continue to navigate future unknowns, we remain ever confident our globally diversified portfolios will harness tomorrow’s winners, wherever they may be, while offering protection against unforeseen risks, wherever they may strike.
That’s the simple power of diversification and discipline: they offer investors their best chance of success.