Growing up in the southwest my family undertook a couple of cross-country road trips that spanned a few days and what seemed like countless miles. During those excursions my parents aimed to quell any disturbance in the back of the car among me and my two older siblings, in hopes of avoiding any serious emotional meltdowns that ultimately result in an unplanned stop to sort things out.
When any raucous behavior started amongst us we were quickly reminded of one destination that, according to my parents, would be all-too-easy to pass right by: Six Flags Over Texas in Arlington, TX. For the kids this day at the amusement park riding as many roller coasters as possible was always a highlight of the trip.
Much like the roller coasters of Six Flags that provide thrilling, albeit gut-wrenching adventures, 2021 produced roller coaster-like experiences for investors that saw an uptick in volatility and resulted in a record year for some indices. While indices in theory do not have the ability to make emotional decisions, investors have the autonomy to buy and sell in and out of the market with the simple click of a mouse.
Keeping an observant eye on the markets is encouraged, but that can quickly lead to rash decisions being made in the heat of the moment. Specifically, one of those emotionally-charged decisions that is often made is selling investments when markets turn south and drastically decline.
The S&P 500, the widely used stock index composed of 500 stocks that are market-cap weighted, gained 26.9% in 2021. Not far off, the tech-heavy Nasdaq Composite Index ended the year +21.4%, and the Dow Jones Industrial Average (DJIA), another widely used stock index ended the year +18.7%. In contrast, the Bloomberg Aggregate bond index, which tracks the broad fixed income market, posted a -1.54% return for the year after it was unable to recover from an abysmal Q1 of -3.37%.
Emphasis in the previous sentence is on the very first word – if. Looking at numbers from a previous year at face value makes it seem like 26% return is feasible for everyone. But there is more to the story than just the final number.
The first half of 2021 mainly focused on Treasury yields and the Federal Reserve’s thoughts on raising interest rates, which led to a double-digit positive first half for most stocks. For investors, it is simple enough to stay the course while things are going well, and the markets are consistently increasing. As the year progressed though, various outside factors led to market volatility. Q3 of 2021 returned just 0.58% for the S&P 500 and produced negative returns for the Nasdaq and DJIA.
One measure that was a consistent topic of discussion during the year was inflation. Inflation is measured by the Consumer Price Index (CPI), and this index shows just how much the cost of goods and services are rising in general. In 2021, the CPI rose over 7%, which is the highest calendar year inflation since 1981. Not all news was bad, as US employers added nearly 6.5M new jobs in 2021. With an average gain of 537,000 new jobs created each month, over 149M people residing in the US had full-time employment.
We could not end the year without one final roller coaster style ride as Q4 was a historic period for stock indices, specifically the S&P 500 up +11% total return for the quarter.
Economic indicators however seemed to slow during that same time period, as the jobs created in the month of December were just 199,000. One final data point that could reflect on the poor decisions of investors, or potentially positive decisions made, is the growth of the money market industry.
From January 1st 2020 to January 1st 2022, the size of the money market fund industry rose from $3.6T to $4.7T. Yes, that is T for Trillion. Investors might have extra stimulus cash? Savings increased during the pandemic-induced reduction in spending? Or, is that a result of investors decreasing market exposure and fleeing to cash? Whatever the reasons, an increase of over $1T in cash is no small sum to consider.
Depending on the emotional capacity of investors, it is unlikely individual portfolios matched the performance of stock indices for the year. With all the outside noise of economic woes, political campaigns, social unrest, and ongoing pandemic protocols it is difficult to remain steadfast in a financial plan. Multiple studies have shown that during periods of high stress, whether self-inflicted or not, investor losses can rise to 7% on average because of emotionally-driven decisions.
One of the biggest factors of investment performance is time, so we want to ensure every second is being utilized for the benefit of growing your wealth. Rather than overinflating the importance of market timing and volatility, the better personal return on investment is identifying personal goals and working with a professional to set you up for success in achieving those goals.