This time last year may have had many investors wondering if a dramatic stock market drop would be imminent, but the numbers are officially in for all to see. With the benefit of hindsight, investors who stayed the course with a long-term focus and diversification reaped gains, as you can see in our Q4 Quarterly Market Review and 2021 Market Review where the results indicate as follows:
US and International Developed Stocks Post Positive Returns, both for the last quarter and 2021 (see page 3 of the attached Q4 Quarterly Market Review and also page 3 of the 2021 Market Review) as well as chart below how US Stocks were up 9.28% last quarter while International Developed Country Stocks were up by 3.14% and Emerging Market Stocks were down 1.31%. Returns for 2021 followed the same theme as you can see on page 3 of the attached 2021 Annual Market Review. US Stocks were up 25.66% last year, International Developed Country Stocks were up 12.62% and Emerging Market Stocks were down 2.54%.
Bonds Were Down Slightly in 2021 (see page 3 of the 2021 Annual Market Review). US Bonds were down 1.54% in 2021 and International Bonds were down 1.40%.
Diversification Still a Key Ingredient to a Winning Portfolio Mix
Poor bond performance does not necessarily change our view to get out of bonds right now, nor necessarily to move everything there either while they are low. Bonds can be a stabilizing force in a portfolio, and we do expect negative returns in the bonds funds which we purchase for clients over any given year.
However, we expect that the negative returns we experience in bond funds to be much less than the negative returns that may be expected in stock funds. See the diversification chart on page 12 of the 2021 Market Review that highlights how different global stock/bond mixes perform and the benefits of diversification from aggressive and 100% Equity (stocks) to 100% Fixed Income (bonds) to various proportions of stock/bond mixes such as 80/20, 60/40, 40/60, and 20/30.
Looking at the 1 year, 3-, 5-, and 10-year comparisons of each of these mixes, you can see that the returns vary, but not as much as one would think among the different portfolio mixes. As clients meet with us, based on their specific situations, risk tolerance and goals, we recommend a mix that is best suited to their specific long-term financial goals.
Stock Market Up Last Year May Give Some Investors Increased Anxiety
On the final page of the Q4 Quarterly Market Review, Weston Wellington, Vice President of Dimensional Fund Advisors, writes that stock market highs can lead some investors to believe that the stock market will soon dramatically drop. Again, that is exactly the sentiment many of our clients voiced this time last time. While stock market lows may be in the cards for the future, record setting stock market returns do not automatically lead to a downturn. Weston shows that the 1, 3 and 5 years returns for the S&P 500 were similar after both a new market high and a 20 % market decline. The moral of the story is that even though 2021 was generally a strong year in the stock market, an investor should not necessarily assume that a dramatic downturn in the stock market is imminent in 2022.