I’ve been doing year-end reviews for a few years now with mixed feelings.  On the one hand, it seems proper to recognize the market events that captured our attention over the past year.  On the other hand, from the long-term perspective of mindful investing, a single year can’t offer particularly meaningful lessons.  And when I read others’ year-end reviews, I usually feel like I just ate a huge nothing-burger.

So, for this year’s annual review post, I thought I’d try mixing an outward view of world events with an inward view of highlights from 2021 Mindfully Investing posts.  Depending on the results, this may be my new approach for my annual reviews or an experiment that I’ll never repeat.

Themes of 2021

The main theme for investing in 2021 had to be lingering bad vibes from 2020.  Tribulations that most of us hoped would go away in 2021 just kept hanging around like party guests who refuse to leave.  These loitering trends turned the word “transitory” into a joke in 2021:

• High inflation
• The pandemic economy
• Meme stocks
• Cryptomania.

While I suppose this is all mildly interesting, you’ve most likely had your fill of these topics by now.  So, I’m going to avoid writing the obvious paragraph about each one or something equally boring.  But, for my own eccentric reasons, I’ll touch on some of these items again as this post progresses.

Historical Context for 2021 Annual Returns

Even though the results from one year have limited usefulness, I still like to see how various asset classes performed on an annual basis.  In 2021, the lingering bad vibes from 2020 impacted the performance of some assets more than others as shown in this graph of the year’s returns using data from Portfolio Visualizer.  All values are in terms of “total returns”, which for stocks includes reinvested dividends.

By viewing this single year in the context of historical returns, we can get a step closer to something meaningful for mindful investors.  So, here’s a graph that shows the percentile position of 2021 returns for each asset class across the distribution of historical annual returns.  The parenthesis after each asset class denotes the historical return database that I used in the comparison.

A percentile is an easy way of expressing how often this year’s annual return was exceeded in all past years.  For example, the top blue bar shows that the 2021 nominal returns for U.S. stocks (S&P 500) were higher than 82% of the years going back to 1879 in the Shiller database.  Or if you prefer, 2021 nominal U.S. stock returns were lower than only 18% of past years.

Together, these graphs show that most flavors of U.S. stocks generated pretty outstanding returns in 2021, even after accounting for this year’s spike in inflation.  Conversely, cash, bonds, gold, and emerging market stocks all lost inflation-adjusted money, and in each case, these losses were pretty unusual by historical standards.

I’ve been warning about potential losses from U.S. Treasury bonds for many years now.  And 10-Year Treasury bonds have responded by laughing in my face and producing pretty decent positive returns in 2019 and 2020.  So, I can’t help but pause to mention that the 10-Year Treasury bond produced a wilting inflation-adjusted loss of -9.4%.  On a nominal basis, that turns out to be a worse return for 10-Year T-bonds than 94% of all years going back to 1928!

It’s also worth noting that annual inflation of 6.9% for 2021 was in itself a pretty unusual event given that only 16% of the years going back to 1879 had higher inflation rates.

Coolest Graphs of 2021

But enough about the world.  Let’s talk about my blog, which is a much more important subject in my opinion.

I’ve always agreed that a picture is worth a multitude of words.  So, here are some of the coolest charts that I produced or presented over the past year.  I know it’s kind of cheeky to be calling my own charts “cool”.  But hey, it’s my blog, and I can be as arrogant as I want.

If you want more interpretation for any of these charts, click on the links to the original posts from 2021.

Mysteries of Volatility and Risk – Despite what you might assume from media articles, annual volatility is generally not predictive of annual returns.  In 2021, U.S. stock returns were historically high, but volatility was quite low with an annual standard deviation of just around 11% according to Portfolio Visualizer.

Ranking The Historical Returns of Asset Classes – In terms of annual return ranks in recent history, stocks have generally performed better than bonds, gold, or real estate (price only).  (Smaller bars in this graph mean higher cumulative ranks over the years.)  As we’ve already seen, 2021 followed this historical ranking script pretty closely.

“Scary” Stocks Go Up Most of The Time – Even on an inflation-adjusted basis, stocks returns have been positive in 68% of the years since 1928.  And 2021 further supported this pattern of mostly positive returns.

Are Global Stocks “Scarier” Than U.S. Stocks? – Stock return data from developed market countries since 1970 indicates that the U.S. stock market is not particularly special in its ability to generate mostly positive returns.  However, U.S. stocks substantially outpaced other developed market (and emerging market) stocks in 2021.

Asset Allocation Using Permanent Loss Risk – Using permanent loss risk instead of annual volatility indicates that investors with a 5-year timeframe or longer can reasonably be invested almost entirely in stocks.  By this measure, the classic 60/40 stock/bond portfolio is extremely conservative except for those with very short investment timeframes.

Investing Disasters and Deep Risk – As this example from Japan shows, when deep risks like world wars have occurred, diversified stock investors have usually fared much better than government bond investors over the long term.

Stocks Are Incredibly Overvalued, And They May Get Even More Expensive – A common measure of stock valuations, the Shiller CAPE Ratio, indicates that U.S. stocks have become shockingly expensive, especially when compared to rock bottom long-term interest rates.  As of the end of 2021, the CAPE Ratio (blue line in the graph) edged up even higher and is now at 39.4.

Future Return Forecasts-Expecting the Unexpected – Because U.S. stocks have become so expensive, most professional estimates of future stock returns for the next decade are quite low.  Unfortunately, the expectations for bond returns are even lower for reasons that became apparent in 2021.

The Returns of Rental Real Estate vs. Stocks – The relative returns of rental real estate and stocks have ebbed and flowed over time, which suggests rental real estate can help as a long-term diversifier to a stock portfolio.

Facts About Rising Inflation That All Investors Should Know – This chart from Advisor Perspectives shows that inflation (green shading) hasn’t been this far above 10-year bond yields (blue line) since the 1970s.  Put another way, inflation-adjusted bond yields are about as negative as they ever get, as evidenced by the negative 9% inflation-adjusted return for 10-Year bonds this year.

Investing for Short-Term Goals Like A House, Business Enterprise, or College – Using permanent loss risk (instead of routine volatility as a risk measure) this graph shows asset allocations for investing timeframes from 1 to 8 years that are only marginally riskier than investing in an ultra-“safe” high-yield savings account.

How to Beat 99% of Professional Stock Pickers – As John Bogle famously said, “costs matter”.  This graph compares actively managed fund performance between the lowest and highest cost funds relative to passive benchmarks.  Investors in active funds pay more for worse performance.  And the more they pay, the worse that performance gets.  I don’t expect 2022 to be any different.

Surprisingly Right or Wrong

I’ve always said that we can’t predict the future, which is why I try to avoid making predictions in my posts.  Nonetheless, it’s easy to fall into the trap of assuming that some unusual occurrence must soon end, or something normal should continue.  In retrospect, I found myself falling into that trap a few times in 2021.

So, here are my surprising predictions from 2021 and how they fared.  I consider them “surprising” by the mere fact that I accidentally waded into prognostication at all.

Got It Right: The Crash of 2020 – I implied that the best market-timing move after the S&P 500’s dip of -35% in March 2020 was to buy-and-hold, which is the only kind of market timing applicable to mindful investors.  That assumption was correct as of the end of 2020 when the S&P 500 was up 15% for the year.

But of course, I didn’t imagine a second dip or crash in 2021 because, like many, I assumed that the pandemic was being pushed out the door by the new COVID vaccines.   Well, COVID is still here, and the situation is arguably worse than ever before.  But somehow the stock market managed to ignore the ever-growing doom and gloom.  The total price growth of the S&P 500 from the low of March 2020 to the end of 2021 has been an astonishing 207%!  That equates to an annualized price return of 50.3% over this same period.

Got It Wrong: Meme Stocks – In February of 2021, I wrote, “The GameStop rally, and the rallies of other recent short-squeeze targets, have pretty much petered out in less than a month.”  At that time Gamestop stock was priced at $64 per share.  Its price continued to slide for a week or two, but by the end of 2021, it was back up to $148!  Some other meme stocks that I mentioned in that same post have done well over this period too:

• AMC Theaters stock went from $6 per share to $21.
• Nokia stock went from $4 to $6.

Perhaps, meme stocks aren’t the passing tornado that I had assumed.  On the other hand, I also mentioned a couple of other memes that didn’t pan out so well from February 2021 to the end of the year:

• Spot silver prices in the so-called “silver squeeze” went from $27 down to $23.
• Blackberry stock went from $14 down to $9.

I guess the pressure from some of these short squeezes created diamonds and others produced lemon juice.

Got It Wrong: Inflation – In October 2021, I wrote, “It’s always difficult to predict the future, but most economists seem to think that inflation will subside quickly, similar to what happened in 2008.  Some inflation watchers are even making the case that the peak has already passed.”

At least I caveated this as an unreliable prediction.  I was working off of September inflation data for that post which showed a 5.4% annual inflation rate.  And here’s the year-over-year inflation for the next three months:

• October – 6.2%
• November – 6.8%
• December – 6.9% (estimated)

Well, the peak has clearly not passed yet.  But on the other hand, most bets still seem to be on lower inflation for 2022.  But that’s just another unreliable prediction.

Conclusions

It seems when economic turmoil erupts, most people’s first worry is about the stock markets crashing.  But 2021 showed that economic uncertainties can sometimes cause so-called “safe havens” like cash, bonds, and gold to suffer the most.

My only other conclusion is that once again, I kind of implied in this post that the stock market will continue to perform well.  So, let me go on record as saying that there could be a crash coming in 2022 for all the same reasons there could have been a crash in 2021.

Best wishes for everyone’s portfolios in 2022!