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Notes Along the Path: January 2022 Edition

Notes Along the Path: January 2022 Edition

January 07, 2022
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Welcome to another edition of Notes Along the Path!

This month’s topics:

  • What Issues Should I Review at the Start of Each Year,
  • 2021 – A Brief Market Review and some thoughts on 2022,
  • How to Follow Through on New Year's resolutions.

Please consider sharing this with someone you know who might be asking themselves (or you!) questions about their financial future.

What Issues Should I Review at the Start of Each Year

It's a good idea to ask yourself some serious questions periodically, so why not take some time at the beginning of the year and take inventory. 

Most of these will not need attention in 2022, but for those that do, make a plan to take them on, whether it's one each week, one a month, or all in a row – that's a matter of personal preference – just do it.

A Banner Year and a New Year (Deja-vu all over again)

The year 2021 was a banner year for investors. The broad-based S&P 500 Index, finished the year up 26.9%. If we included reinvested dividends, the index advanced 28.7%, according to S&P Dow Jones Indices.

I started Your Best Path at the end of 2018. So this is my 3rd strait year of writing this type of new year wrap-up. 

In 2019 the S&P was up 31.49% and in 2020 it was up 18.4%1.  When you add those gains to this year's 28.7% You have a total return of just a fraction over 100% - a double in 3 years. 

We have not seen a streak like this since the 5-year-run at the end of the 90's when from 1995 to 1999 the S&P returned 37.58%, 22.96%, 33.36%, 28.58%, and 21.04%1 for a 5 year cumulative gain of 251%.  (https://www.slickcharts.com/sp500/returns)

Much better-than-expected corporate profits, which were powered by an expanding economy, plus an easy monetary policy compliments of the Federal Reserve, deserve much of the credit for this year's rise.

Low interest rates, low bond yields, and rising profits easily offset worries about the lingering pandemic and much higher-than-expected inflation.

But we are now looking ahead into 2022. What might the new year bring? After last year’s strong advance, what might be in store for this year?

As always, a little historical context first. Since 1950, there have been 26 years in which the total annual return of the S&P 500 Index exceeded 20%, according to data provided by the NYU Stern School of Business. In the following year, the S&P 500 Index advanced 20 times, or 77% of the time, in line with the long-term average.

The average up year was 18.1%, while the average down year was 6.4%.

It’s an interesting exercise, but must always remember that past performance is no guarantee of future results. Each year will have its own distinctions.

What dictates the market’s direction in the long term will, as always, be the economic fundamentals and whatever impacts those fundamentals.

For example, what might the Federal Reserve do with interest rates? At the beginning of 2021, the Fed expected no rate hikes in 2022. However, it failed to predict last year’s surge in inflation.

 

That is not a criticism. 

 

Clients may have heard me say that I am not in the prediction business.  (I do make predictions all the time, although mostly I keep them to myself.) What I mean is that my business – and the way to consistently make money – is to respond intelligently to what does happen rather that act on guesses about what might happen.

The Fed operates on the same model. 

They tell us what they think is likely, but they act mostly in reaction to what has actually happened.

As the year ended, the Fed’s new projections, which it released after its December meeting, reflected a forecast of three quarter-percentage-point rate hikes this year. If Omicron knocks the economy back those rate hikes will be put on hold.

Are those potential rate hikes already being discounted by investors? (I suspect not entirely.)  If inflation fails to ease--or worse, accelerates--could the Fed take a more aggressive posture? (It's possible, but I don't think it's likely to worsen.)

Corporate profits are also a key driver of stock prices. Consider this: If you were to purchase or sell a small business, wouldn’t recent and projected profitability play a big role in the sales price? It absolutely would. The same principle holds for publicly traded companies.

How will the pandemic play out? We’ve seen Delta and we’re now seeing a surge in cases tied to Omicron. The economic impact of Delta was limited, and thus far, investors have side-stepped economic worries about Omicron. But what does 2022 hold?

We’ve posed several important questions that don’t offer easy answers. We may see a pullback in 2022, and we recognize that downturns are a part of investing.

I'm not in the prediction business, but I do think a correction in stock prices is likely this year. So what am I doing about it?

Not much. (Because I'm not in the prediction business.)

I am gradually building up a little extra cash in investment accounts so that if there is a correction I can buy stocks on sale.

 

Based on your goals, circumstances, and risk tolerance, we craft portfolios that help manage risk, but we can’t eliminate risk.

If you trade the fear of a sell-off for a savings account, you won’t participate in the long-term upside that stocks have historically offered. Conversely, take on too much risk when the market has been strong, and you may experience sleepless nights in a swift downturn.

If life events have forced you to rethink your goals, let’s talk. Financial plans are not set in stone.

Yet, adherence to one’s financial plan and a long-term focus have historically been the straightest path to reaching one’s financial goals. We may see volatility next year. But predictions are simply educated guesses. As we’ve seen in the past, sell-offs, when they occur, are followed by rebounds.

Keep this in mind as we navigate the New Year together.

I trust you’ve found this review to be educational and helpful. If you have any questions or would like to discuss anything, please give me a call.

How to follow through on New Year's resolutions

The new year is the break in the calendar that many of us use to take off the old and put on the new. Like turning the page. It's a new chapter - maybe a whole new book! You can't change the past, but you can change the future.

One way we can make a change is to set new goals, aka New Year’s resolutions.

If you are considering financial resolutions, you might include getting debt under control, saving more for retirement, getting a head start on taxes, or reviewing health and life insurance options. It’s an ancient idea.

Did you know that there is evidence that the first resolutions were made by the Babylonians about 4,000 years ago? Julius Caesar reintroduced the practice when he established January 1 as the start of the new year in 46 B.C.E.

New Year’s resolutions are still made these days, but few follow through on them. According to a recent CBS News poll, only 29% of Americans had planned to make New Year’s resolutions this year, down from 43% in 2021. Moreover, Statista reports that only 4% who make resolutions accomplish all they set out to do; 8% meet most of their goals, and 16% meet some.

It’s not encouraging.

We make resolutions to accomplish goals, tasks, and to improve ourselves. In the financial realm, wouldn't it feel great to resolve to and get debt under control, save more for retirement, get a head start on taxes, or finally review those health and life insurance options?

We get a sense of satisfaction when we “check that box.” So how can we increase our chances of success? Follow-through is critical, and these tips will help you not only set, but attain your goals in the new year.

Set resolutions and achieve your goals

  1. Decide what is important to you. Set goals that are meaningful and within reach. Many set worthy goals, but they are too lofty or too difficult to accomplish. Traveling the world may be exciting, but it requires massive planning. And, honestly, it’s vague.

 A healthier lifestyle is a good resolution, too. But what does it mean to you? Does it mean working out or losing weight? If it’s working out, then what, when, and how often?

 Be specific and get granular. Do you want to start a new hobby? Have you always wanted to paint? Check with local resources in your area and sign up for a class by the end of the month. It’s specific, and you have attached a date to your resolution.

 

  1. Pick one, maybe two. Choose too many and you’ll likely end up accomplishing little. Instead, pick one or two. Elizabeth Saunders writes in the Harvard Business Review, “Because there aren’t usually instant negative effects, you’ll tend to look at these goals as ‘extras.’ And since most of us don’t have much time or energy for a lot of extras, you’ll increase your likelihood of success by picking just one or two resolutions.”

 

  1. Write down your goals. According to , “Psychology professor Dr. Gail Matthews, at the Dominican University in California, led a study on goal-setting with nearly 270 participants. The results? You are 42% more likely to achieve your goals if you write them down.”

 Writing down your resolutions has a two-fold effect: it forces clarity, and it is motivating.

 

  1. Implement a plan to achieve your resolutions. For example, let’s take something simple. You want to get your house cleaned by the beginning of spring. You have your resolution, you’ve written it down, and you have a date.

 It may seem like a daunting task. But what if you were to schedule one room each day, or two rooms a week. Instead of always focusing on a far-away peak, you are taking one step at a time, and your goal is now manageable.

 

  1. Recognize small wins. Writing down your small successes allows you to see your progress.

 

  1. Keep yourself accountable. And, whatever your resolution may be, it helps to have an accountability partner—preferably someone you look up to. Besides, you can encourage each other.

 

  1. Reward yourself. There will be an inherent sense of satisfaction when you have achieved your New Year’s resolution, but why not give yourself a prize, a reward when you have checked that box? It’s an accomplishment, and you deserve to celebrate it.

You won’t be perfect. At times, life will get in the way. That’s ok. Just keep coming back You may not accomplish your resolutions right away, but with persistence, you’ll see success.

 

If you like this newsletter, I encourage you to pass it on to any contacts you have that might benefit.  It's easy. Just click on the web address (the URL) above, copy it (ctrl-C), and paste that into an email to your friend or family member.

 

I remain honored and humbled that my clients have allowed me to serve as their financial advisor. Thank you for your support.

 

All the Best!

Gordon Achtermann, CFP®
T:703-573-7325