2021 Investment Review

How did the investment markets perform in 2021? Briefly, it was a very good year for the stock market but not so good for bonds.

Stocks

For three years running, the US stock market has generated near-record returns:

• 2019:  31%
• 2020:  21%
• 2021:  26%

During the past 10 years, US stocks have averaged annual returns of 16% —  stocks have grown by a factor of ~4.4x over this time. If you put $100 in an index fund 10 years ago and then did nothing, you’d have ~$440 today. Not too shabby for passive investing. These returns are nearly unprecedented and significantly above the long run average of ~10% per year over the last 100 years.

International stocks have not fared as well and were up “only” 8% in 2021 and averaged 8% over the past 10-year period. I don’t have a good reason for why those returns have lagged behind US stocks.

Real Estate

REITs (real estate investment trusts) were the real stars in 2021. REIT returns were roughly:

• US REITs:  40% (!) in 2021 and averaged 11% over the past 10 years
• non-US REITs:  8% in 2021 and averaged 10% over the past 10 years

Corporate office buildings have been nearly empty for nearly 2 years, shopping malls, restaurants, and hotels are shutting down, and the commercial real estate sector grows in value by 40% in 2021. Go figure.

Bonds

Bonds come in lots of flavors so it’s hard to be precise but, 2021 was a down year for the bond market:

• Long-term bonds:  -4%
• Intermediate-term bonds:  -2%
• Short-term bonds:  <1% (think bank CDs or Treasury Bills)

Over 10 years, average annual returns for bonds were the following:

• Long-term bonds:  6%
• Intermediate-term bonds:  3%
• Short-term bonds:  <1%

Target Date Funds

My go-to recommendation for most investors for retirement savings is a target date fund. How have they performed? Well, there are lots of them to consider so there’s no single answer but I’ll summarize three retirement dates for the Vanguard ones:

• 2020:  8% in 2021 and 9% over 10 years
• 2035:  13% in 2021 and 11% over 10 years
• 2050:  16% in 2021 and 12% over 10 years

They’ve under-performed a portfolio of 100% US stocks but you should expect that when the stock market is up. If/when the stock market tanks, these funds should have a smaller dip.

What to do?

One conclusion is clear — if you have a long-term horizon, stocks are likely to be a better bet than any alternative asset classes. If you have a short-term horizon or simply cannot risk a significant loss, it’s a more difficult decision, given the volatility of investing in stocks. And regarding short-term bonds, they have not even kept up with the rate of inflation — said another way, their real interest rate (i.e., net of inflation) is negative.

What does this all mean for the future? I have no idea (but no one does). Wall Street is the land of aphorisms and an old one is that “bulls make money, bears make money, but pigs get slaughtered.” However, another is that “the trend is your friend.” Suffice to say, you can find a pithy piece of Wall Street wisdom to support any view you chose. 

While stock prices may seem high, I counsel against trying to time the market because, as I have been known to say, you have to be right twice — once when you decide to get out and then, again when you get back in. That’s simple with the benefit of hindsight but awfully hard to do in real time.

My best advice remains the same:  pick an asset allocation suitable for your circumstances and build it with low-cost index funds or a target date fund. Then, try to leave it alone and not check your account balance unless you really need to know.