For the most part, markets in 2021 have shown continued improvement on last year. In fact, the worst place to have money so far this year is cash. The U.S. and the broader international and emerging market indexes are positive year to date.
Investing in a world where everything seems to be working out — except “safe” bonds and cash — it can be tempting to tweak your portfolio. Why not move that money earning nothing (high yield bonds — U.S. Agg index is -1.6% YTD) into something much better? After the last six months, and the six months prior to that, I bet a lot of people are thinking exactly that. When thoughts like that pop into your head it’s always worth asking yourself a few questions.
First, am I taking enough risk to meet my goals? Building a portfolio is not an exact science. Uncertainty around the future makes that impossible. But it’s certainly plausible that some investors are taking less risk than they can handle. If you have less money in stocks than you’re comfortable with, can handle more risk and volatility, then maybe a change is warranted.
However, the alternative should also be considered. If you have more money in stocks than you’re comfortable with, reducing your exposure might be warranted. Successful investing has never been about getting the highest return this year. It’s about getting the best long-term return at a risk you’re comfortable taking.
Second, am I making changes because I feel like I’m missing out? FOMO sucks. It gets a lot of investors into trouble. Frankly, the returns other people and/or asset classes are earning in the market are irrelevant to what you’re trying to accomplish. If your portfolio is sound and doing what it’s set out to do, whatever is going on outside of that is a distraction. Ignore it. Far too many investors shoot themselves in the foot trying to chase returns.
Finally, it’s always good to ask what if I’m wrong? The correct answer is you lose money. Are you comfortable with that potential outcome? A sound portfolio is built with this question in mind. It also happens to be the last question anyone asks when markets are rising and everyone’s optimistic and appears to be making money. Much like today!
The heightened speculation that emerged in 2020, spilled into this year, and is ongoing. There are a lot of “brilliant” investors around more than willing to show off their quarterly gains. It’ll be interesting to see how long that lasts.
Of course, when everyone’s optimistic and few think they can lose money, getting rich quick becomes the strategy du jour. Many will eventually figure out it has one tremendous downside. You lose everything. Until then hopes and dreams are driving pockets of the market for now.
You’ll find four tables below. The first is a quarterly breakdown of global stock markets and U.S. sectors. The next three are monthly returns for developed markets, emerging markets, and U.S. sectors. A few broader lessons stand out:
- Six-month (and annual) returns paint a poor picture of how much markets fluctuate. The tables below offer a better example of what investors face when they earn an annual return.
- A lot can happen in a month! The tables are a reminder of what you miss by trying to time the market. Sure you might get lucky and sell just in time to avoid a double-digit loss. But being out of the market for a single month can cost you significant gains. In some cases, returns in a single month accounted for most, if not all, the year-to-date returns. Missing an entire quarter costs you even more.
- The advantages of diversification should be clear to anyone who knows how impossible it is to pick which asset class or index will be the top performer in any given year. A diversified portfolio not only tempers your overall losses when markets decline, it benefits when positive returns show up in the unlikeliest of places.
And now for some highlights on the lighter side:
- Who said the energy sector was dead? It’s the best performing U.S. sector and by a huge margin. A 46% total return year to date! Almost half that was in February.
- The second best was financials at 26%, followed by real estate at 23%.
- The energy, financial, and real estate sector were the worst performing sectors last year — each ended 2020 with losses.
- REITs also went from worst to best. Last year it saw a -5.1% return. Year to date it’s up 21%.
- U.S. small caps added to last year’s dominance over large caps with a 2% edge YTD. Small caps were also the only asset class/market with a gain in each of the first six months.
- The S&P 500 energy and real estate sectors were the only sectors with gains in each of the first six months of 2021.
- Only 12 global markets sit at a loss YTD. From least worse to worst: Argentina, Thailand, Philippines, Portugal, Pakistan, Malaysia, Indonesia, Egypt, New Zealand, Peru, Colombia, and Turkey.
- 23 global markets earned double-digit gains YTD. Of those, 6 exceeded 20% returns.
2020: A Year in Returns