A new year brings new hope. Hope for a vaccine, hope for a stronger economy, and hope to get back to normal. One can also hope for another good year in the stock market! Unfortunately, hope is not a strategy. Instead try using the end of the year to plan how to invest for next year.
While no one has a crystal ball, there are trends worth watching. Here are a few of the trends I am watching and my advice on investing in the new year:
1. Stay diversified
Individual investors tend to go after what is working, eschewing what is not. That strategy may lead to good performance now, but every dog has its day. No one sector, no one country, no one stock, wins all the time. (For a good visual see Callan’s Periodic Table of Investments). In the past 20 years, 2000-2019, not a single investment asset class — Large Cap Stocks, Small Cap Stocks, Real Estate, Emerging Markets to name a few — had the best returns in back-to-back years. Each year the best investment category flip-flopped.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
My advice is to remain as diversified as possible. What worked in the past year, may not work this upcoming year.
2. Rebalance
Stock investors today may own more technology, more “growth” and more U.S. stocks than a year ago. That’s because those areas of the stock market did very well in 2020. However, the stock market can change very quickly. We saw that in November, when oil stocks — which performed poorly earlier in 2020 — surged for the month.
Certain sectors, such as airlines, energy, banks and other “value” stocks, may not recover in 2021. Demand for those goods and services may not pick up till 2022. But the stock market is forward looking, pricing in an anticipated recovery. The stocks of airline, energy and bank companies may do better in 2021 than their respective economies.
I’m not saying load up on these sectors, but I am saying if you already own them, be patient. And if you own too much “growth” and tech, consider rebalancing — that is skimming off some of the profits and redeploying into other asset classes you may be light. A good place to rebalance is in a 401(k) or IRA, where there are no tax consequences.
3. Opportunistic investors with longer time horizons may want to shift their focus
The world is a very big place. The global recovery is uneven. Some countries, such as China, are ahead of the U.S. in terms of their COVID-19 recovery. That may mean more opportunity abroad for U.S. stock investors. International stocks overall have lagged U.S. stocks for several years. However, certain countries may recover faster in 2021 for a variety of reasons, like having a better or more successful vaccine rollout.
Small cap stocks did very well in 2021. Specifically, small-cap growth stocks. These tend to be small technology companies benefitting from consumers staying home, like Shutterstock, Stitch Fix or Okta.
Looking forward this trend could continue. Small cap growth stocks tend to do well coming out of a recession. But if, as I mentioned earlier, investors start to cycle back into large value stocks, like bank and energy stocks in 2021, then small-cap value stocks may outperform their larger counterparts. More risk, more reward. And potentially more misery.
Buying small-cap value stocks now may be early, and investors may not be rewarded for some time. But when is the best time to buy stocks? When they are on sale or when they are overpriced?
No one really knows what is in store for the investment world in 2021. Any number of unforeseen events can happen. My advice is to use the beginning of the year to rebalance and check your diversification for outliers. More risk-averse investors may want to seek opportunities in out-of-favor sectors for a small portion of the portfolio.
Disclaimer
Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.
-
Stock Market Today: Have We Seen the Bottom for Stocks?Solid first-quarter earnings suggest fundamentals remain solid, and recent price action is encouraging too.
-
Is the GOP Secretly Planning to Raise Taxes on the Rich?Tax Reform As high-stakes tax reform talks resume on Capitol Hill, questions are swirling about what Republicans and President Trump will do.
-
Social Security Is Taxable, But There Are WorkaroundsIf you're strategic about your retirement account withdrawals, you can potentially minimize the taxes you'll pay on your Social Security benefits.
-
Serious Medical Diagnosis? Four Financial Steps to TakeA serious medical diagnosis calls for updates of your financial, health care and estate plans as well as open conversations with those who'll fulfill your wishes.
-
To Stay on Track for Retirement, Consider Doing ThisWriting down your retirement and income plan in an investment policy statement can help you resist letting a bear market upend your retirement.
-
How to Make Changing Interest Rates Work for Your RetirementHigher (or lower) rates can be painful in some ways and helpful in others. The key is being prepared to take advantage of the situation.
-
Within Five Years of Retirement? Five Things to Do NowIf you're retiring in the next five years, your to-do list should contain some financial planning and, according to current retirees, a few life goals, too.
-
The Home Stretch: Seven Essential Steps for Pre-RetireesThe decade before retirement is the home stretch in the race to quit work — but there are crucial financial decisions to make before you reach the finish line.
-
Three Options for Retirees With Concentrated Stock PositionsIf a significant chunk of your portfolio is tied up in a single stock, you'll need to make sure it won't disrupt your retirement and legacy goals. Here's how.
-
Four Reasons It May Be Time to Shop for New InsuranceYou may be unhappy with your insurance for any number of reasons, so once you've decided to shop, what is appropriate (or inappropriate) timing?
