As we lurch from one global disaster to another, you might be forgiven for thinking there’s no point worrying about how the financial markets performed last year.
However, despite the unprecedented global challenges we face, the power of evidence-based investing can be seen in the outcomes for investors who chose to sit tight.
Here’s a brief overview of 2021 – a year that underlined the difficulty of predicting performance and the enduring benefits of diversification.
Economic rebound
Following a volatile 2020, investors hoped a degree of normality would return in 2021. Although new Covid variants held back market recovery to a degree, global GDP grew, eventually surpassing pre-pandemic levels.
A relatively steady market rise continued throughout the year. For example, large cap stocks ended 2021 on an almost record high. Despite rising inflation, supply chain issues and price increases in food and energy, the financial industry was buoyed by strong corporate earnings and consumer spending that rebounded from 2020’s lows. There were ups and downs in the second half of the year, but some near all-time records were still achieved.
The effects of inflation
As rising inflation continues to dominate domestic headlines, we know some of you are understandably worried about its effect on your investment portfolio.
Historical data shows that 23 out of the last 30 years saw positive returns, even after adjustments were made for the impact of inflation. In fact, it has been proved the weakest returns often occur when inflation is low.
Likewise, there is no need to assume inflation will have negative effects on fixed income. From 1927 to 2020, the median inflation was 2.68% and many types of bonds outperformed it during that period. Let’s not forget this included the double-digit inflation of the 1940s-1970s.
Is the bubble about to burst?
With market highs coming thick and fast towards the end of 2021, investors could be forgiven for worrying that stocks are overvalued and are approaching a ceiling.
When looking at monthly returns on the S&P 500 index from 1926 to 2021, 30% of observations were new market highs. After those records were set, the average annualised compound returns ranged from 14% after one year to more than 10% during the next five years. These results are close to the average returns for any given period of the same length.
What does this tell us? Reaching a new high does not mean the market will retreat. Stocks are intended to deliver positive returns for investors, so seeing records set fairly regularly should be expected.
Be optimistic
As the last few years have taught us, no one can predict when the latest crisis will subside or the next one will loom into view. What we do know is that the financial markets are forward looking and reflect optimism and that is what kept returns on track last year.
2021 emphasised the need for discipline and diversification in any investment strategy and as we enter another period of political turmoil, there is no indication this approach should change.
To find out more about our investment philosophy, don’t hesitate to contact us on (01246) 298181 or email: enquiries@belmayne-ifa.com
