What investments fared best in 2021? A recap
Before looking ahead at where should I invest in 2022, we should recap the year of 2021. The year 2021 was another year of overall market consolidation. There were ongoing struggles across the world as COVID 19 continued to challenge the preparedness of every country and new variations emerged. Central Banks across the world continued to provide economic stimulus via the formal process of Quantitative Easing (QE). QE is a form of monetary policy used by central banks as a method of increasing the domestic money supply and spurring economic activity. The US Federal Reserve’s balance sheet ballooned following the announcement to carry out QE. The balance sheet had reached 8.87 trillion US dollars as of 18 January 2022. Although obviously negatively impacting the future debt repayment requirement, this has been a powerful stimulus to the US economy, and this was reflected particularly in both the stock and cryptocurrency markets.
If we look at the S&P 500 index (described by Investopedia as a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S) return for the 12 month period over 2021 we see it had an increase from 372.89 (31-12-2020) to 475.53 (31-12-2021). This equates approximately to an increase of 27.5% for the year which is a solid return. Three continuous years of similar returns would double your portfolio!
Following, I will present a couple of tables which outline some of the best performing assets overall for the period. The Federal Reserve’s monetary policy, obvious supply chain struggles, and high demand for fuels and raw materials for the clean energy transition largely shaped the markets direction. As visualcapitalist explains, speculation and the energy required for the world’s reopening were two of the main themes evident in 2021. This was reflected in Bitcoin (59.8%) and WTI crude oil (56.4%), being the top two performing assets in that time frame. Notable poor performers over this period included: Bloomberg Barclays Corporate Bonds Index (-1.2%), Bloomberg Treasury Index (-2.5%), Gold (-3.6%) and Silver (-11.7%).
Overall Assets Performance in 2021
The next table presents an alternative view on the 2021 performance. This table show the top performing Exchange Traded Funds (ETF’s). In simple terms, an ETF is a basket of securities that trade on an exchange just like a stock does. As explained in this ETF.com article, and in alignment with the results shown above, Natural gas and energy ETFs dominated the list of best-performing ETFs for the year, with carbon credit strategies, rare metals, coffee futures and freight futures also making an appearance. Some of these ETF results were spectacular: Breakwave Dry Bulk Shipping ETF (282.99%) and iPath Series B Carbon ETN (147.21%).
Best Performing ETF’s in 2021
For those investors who were open to invest in more risky assets such as cryptocurrencies (a cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend) some of the top performing ‘coins’ had crazy eye-watering returns: Shiba Inu (SHIB) – 43million%, Terra (LUNA) – 13,790%, Axie Infinity (AXS) – 12,022% and Solana (SOL) – 10,000%. If you were clever or fortunate enough to purchase these early, you would have enjoyed an amazing 2021. Remember however, very high returns are normally associated with high-risk assets.
Now that 2022 is upon us and February has arrived already, what are the risks that we need to consider as we prepare to invest our hard-earned funds?
What are the main risks faced by investors in 2022?
Before I can answer the key question of where should I invest in 2022, we need to perform a risk appraisal. The headwinds facing investors in 2022 has certainly not diminished. If anything, they have increased and do not look to be leaving us anytime soon. The COVID 19 virus continues to antagonize populations around the world. The recent Omicron strain has proliferated in almost every country and infections, although perhaps milder, have accelerated. This continues to play havoc with the economies of the world, and we have seen flow on impacts to supply chains and impact on staffing levels across all industries and workforces.
Also, whilst the QE policies have helped countries maintain some level of economic normality, we are now witnessing a significant rise in inflation across the world in most if not all asset classes. US inflation alone has hit a 40 year high at 7%. Cost of property has increased at a frightening pace and the daily shopping experience clearly demonstrates increased costs on products across the board. To counteract the fast rise of inflation, Central Banks are now looking at a tapering of QE policies and commencement of increases to interest rates, at a gradual pace.
In addition to the above, we have geo-political tensions rising. There are ongoing tensions in the South China Sea and on the Russia/Ukraine border with an invasion of the Ukraine, a distinct possibility.
All the above is making markets nervous, and we have already seen high volatility in share markets across the world. Growth stocks have been the hardest hit to date as markets re-evaluate their future potential profits. Any companies that miss profit/earnings projections or indicate issues in future growth are being hit extremely hard. The cryptocurrency markets have not been excluded with most ‘coins’ well off their all-time highs.
When markets are booming, we are often hear the phrase, that ‘cash is trash’ and it is best to stay invested, otherwise, inflation is just melting away at the purchasing value over time. However, in high-risk times, when volatility is extreme, sometimes it is more prudent to sell out of risky assets and have cash available to make great buys when assets sell off and are at an excellent valuation.
It remains to be seen if the markets will encounter a significant correction in the near term. Investors need to remain cautious and vigilant. If there is a significant sell-off however, wonderful opportunities might present themselves. As the great investor Warren Buffett would say, “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.
Where should I invest in 2022?
As I am not a licensed financial planner/adviser, I cannot offer any financial advice. However, my own investing experience and learnings along the way (some of these have been painful) have tended to guide me well over the course of time. These learnings and suggestions include the following:
- Build up a cash saving equivalent to at least four of months’ salary to ride out any difficult times and or be ready to buy great assets at good valuations should we have a sizeable stock market fall
- Diversify your investments across asset classes including property, stocks, crypto. A goal of owning your own home/unit is very important so that you can come off the continuous ‘renting’ cycle
- Invest a higher percentage of your savings into superior assets within each asset class. An example approach would be as follows:
- Property – purchase your own home/unit that you can afford – do not overextend on a mortgage
- Stocks – purchase an equivalent dollar proportion of Google, Amazon, Apple, Tesla, Microsoft, Facebook (Meta), Visa
- ETF’s – invest in a couple of the better performing, low-cost index funds. One example is the Vanguard U.S. Total Market Shares Index ETF (VTS) which has averaged 20.36% over the last 10 years and having a relatively low management fee of 0.03% p.a
- Cryptocurrency – though still high risk, this space could be life changing over the next 10 years and it is only in its infancy – with this component, adopting a lower risk to higher risk approach, split down into bitcoin 50%, Ethereum 12.5%, Solana 12.5%, remaining 25% against next top 5 altcoins
- If you are able to and have a regular salary, try to dollar-cost-average (dca) into these investments on an ongoing basis, eg this might be once a month and you might alternate across the various asset types
- For the investor, time is on your side. Do not try to ‘time the market’ but rather what is more important, is ‘time in the market’. If you can invest for the longer term (five years or more), the power of compounding will be significant
- Review your investment portfolio ongoing. Either a 6 monthly or yearly review is appropriate. Remove poor performing assets and reallocate funds as required.
Your PROFITABLE ACTION STEPS this time around:
- Review your current portfolio carefully and see how it has performed over 2021. Decide on a plan of action for 2022 and stick with it. Remove dud performers which have no chance of turning around. Decide on what asset class needs some attention. Investing even a small amount, on a regular basis, will add up over the course of time.
- Keep reading and learning. Find great investment books and knowledgeable YouTube channels. This will help you decide on suitable investment objectives and strategies.
- Bitcoin or any other cryptocurrency should only comprise a small percentage of your portfolio. As crypto is highly volatile, don’t invest anything in this space that you cannot afford to lose. As always, do your research first and consult your own financial planner/adviser.
- If you haven’t read this article on the ‘ELEMENTS OF INVESTING’, you will find it an interesting and informative read.
Stay safe, healthy and wise and most importantly of all, take ACTION.