2021 Illustrated Market Review

Today, in a whole new year, let’s talk about parts versus wholes. The theme is hardly new, but it bears repeating, lest we forget how essential they both are—to each other, to us, and to our financial well-being.

There’s never a lack of noise coming from the moving parts that make up your whole portfolio, especially whichever ones are squeaking the loudest at any given time.

This is no surprise. The world is enormous. To cope with information overload, we engage in what behavioral psychologists refer to as heuristics. These are rules of thumb, or mental shortcuts that take us past what seems inconsequential to our survival. They let us focus instead on the scariest snakes, and lowest-hanging fruit we can find.

In many ways, heuristic thinking has worked wonders for us; it still does. But as investors, we end up overreacting to the most exciting or alarming news, and overlooking the less obvious evidence on how to create financial stamina.

Consider your reports, available at www.openwindowFS.com/plan, in this context.

Market Summary

In terms of fruitful investing, 2021 markets offered a bumper crop of seemingly easy pickings.

• The Wall Street Journal observed how low rates and busy investors “helped the S&P 500 close at a record 70 times this year, more than one-quarter of all trading days … and pushed the index up 27% in 2021.”
• Morningstar reported that 2021 was also a banner year for companies going public, driven largely by SPACs going public at “more than 5 times the number from the year before.”
• Traditional and thematic [fund] launches were popular as well. Morningstar reported: “As of Nov. 24, a record 406 new exchange-traded funds were launched in 2021. … The top 100 are the Swiss Army knives of the [fund] world. … [But] There were plenty of suspect newcomers in the crowd in 2021. A common thread among many of them is that they prey on investors’ impulse to chase what’s hot.”

Index Returns

Past results is not a guarantee of future results. Indices are not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]), Global Real Estate (S&P Global REIT Index [net dividends]), US Bond Market (Bloomberg US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2022, all rights reserved. Bloomberg data provided by Bloomberg.

Impact of Diversification

2021 INDEX RETURNS

These portfolios illustrate the results of different global stock/bond mixes and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time.

Period Returns (%)

Growth of Wealth: The Relationship Between Risk and Return

1.STDEV (standard deviation) is a measure of the variation or dispersion of a set of data points. Standard deviations are often used to quantify the historical return volatility of a security or portfolio.

Diversification does not eliminate the risk of market loss. Past performance is not a guarantee of future results. Indices are not available for direct investment. The results reflects the growth of a hypothetical $10,000. Assumes all models have been rebalanced monthly. All results results are based on results of indexes with model/back-tested asset allocations; the results was achieved with the benefit of hindsight; it does not represent actual investment strategies. The index models are unmanaged and the model’s results does not reflect advisory fees or other expenses associated with the management of an actual portfolio. In particular, Model results may not reflect the impact that economic and market factors may have had on the advisor's decision making if the advisor were actually managing client money. The models are not recommendations for an actual allocation. Indices are not available for direct investment. Backtested results results assume the reinvestment of dividends and capital gains. Sources: Dimensional Core Plus Wealth Index Models. Dimensional Fund Advisors LP for Dimensional Indices. Copyright 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. 

US Stocks

2021 INDEX RETURNS

The US equity market posted positive returns for the year and outperformed non-US developed and emerging markets. Value underperformed growth in large cap stocks but outperformed growth in small cap stocks. Small caps underperformed large caps. REIT indices outperformed equity market indices.

Ranked Returns for 2021 (%)

World Market Capitalization—US

Period Returns (%)

Past results is not a guarantee of future results. Indices are not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Value (Russell 1000 Value Index), Large Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Value (Russell 2000 Value Index), and Small Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Dow Jones US Select REIT Index used as proxy for the US REIT market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2022, all rights reserved.

International Developed Stocks

2021 INDEX RETURNS

Developed markets outside the US posted positive returns for the year, underperforming US equities but outperforming emerging markets equities. Value outperformed growth. Small caps underperformed large caps.

Ranked Returns for 2021 (%)

World Market Capitalization—International Developed

Period Returns (%)

Past results is not a guarantee of future results. Indices are not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI World ex USA IMI Index is used as the proxy for the International Developed market. MSCI data © MSCI 2022, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. 

Emerging Markets Stocks

2021 INDEX RETURNS

Emerging markets posted positive returns for the year, outperforming developed ex US equity markets but underperforming US equities. Value outperformed growth. Small caps outperformed large caps.

Ranked Returns for 2021 (%)

World Market Capitalization— Emerging Markets

Period Returns (%) 

Past results is not a guarantee of future results. Indices are not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI Emerging Markets IMI Index used as the proxy for the emerging market portion of the market. MSCI data © MSCI 2022, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. 

Country Results 

2021 INDEX RETURNS

The Czech Republic and UAE recorded the highest country results, while Turkey and China posted the lowest returns for the year.

Past results is no guarantee of future results. 

Country returns are the country component indices of the MSCI All Country World IMI Index for all countries except the United States, where the Russell 3000 Index is used instead. Global is the return of the MSCI All Country World IMI Index. MSCI index returns are net dividend. Indices are not available for direct investment. Their results does not reflect the expenses associated with the management of an actual portfolio. Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. MSCI data © MSCI 2022, all rights reserved.

Real Estate Investment Trusts (REITs)

2021 INDEX RETURNS

US real estate investment trusts outperformed non-US REITs during the year.

Ranked Returns for 2021 (%)

Total Value of REIT Stocks

Period Returns (%) 

Past results is not a guarantee of future results. Indices are not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones and S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Commodities

2021 INDEX RETURNS

The Bloomberg Commodity Index Total Return gained 27.11% for the year. Unleaded Gas and Brent Crude Oil were the best performers, advancing 69.54% and 65.49%, respectively. Silver and Soybean Meal were the worst performers, declining 12.30% and 10.23%, respectively.

Ranked Returns for Individual Commodities (%)

Period Returns (%) 

Past results is not a guarantee of future results. Index is not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Commodities returns represent the return of the Bloomberg Commodity Total Return Index. Individual commodities are sub-index values of the Bloomberg Commodity Total Return Index. Data provided by Bloomberg.

Fixed Income

2021 INDEX RETURNS

Interest rates in the US Treasury fixed income market generally increased during the year. The yield on the 5-year US Treasury note added 90 basis points (bps) to 1.26%. The yield on the 10-year US Treasury note increased 59 bps to 1.52%. The 30-year US Treasury bond yield rose 25 bps to 1.90%.

On the short end of the yield curve, the 1-month US Treasury bill yield decreased 2 bps to 0.06%, while the 1-year US Treasury bill yield climbed 29 bps to 0.39%. The yield on the 2-year US Treasury note increased 60 bps  to 0.73%. 

In terms of total returns, short-term corporate bonds declined 0.47% for the year. Intermediate-term corporate bonds lost 1.00%. The total return for short-term municipal bonds was 0.36%, while intermediate-term municipal bonds gained 0.51%. Revenue bonds generally outperformed general obligation bonds for the year.

US Treasury Yield Curve (%)

Bond Yields Across Issuers (%)

Period Returns (%)

One basis point (bps) equals 0.01%. Past results is not a guarantee of future results. Indices are not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds, and the Yield to Worst are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofA US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofA Corporates, BBB-A rated. Bloomberg data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2022 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2022 ICE Data Indices, LLC. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Global Fixed Income

2021 Yield Curves

Government bond yields in the global developed markets generally increased for the year. Term premiums were generally negative across global developed markets. Short- and intermediate-term nominal interest rates were negative in Japan and Germany. 

Changes in Yields (bps) Since December 31, 2020

One basis point (bps) equals 0.01%. Source: ICE BofA government yield. ICE BofA index data © 2022 ICE Data Indices, LLC. 

What will 2022 Bring?

Will inflation rage in 2022? What if the Federal Reserve fulfills its promise to wind down the economic stimulus programs—the ones that have left markets awash in cash—and aggressively raises interest rates instead? Will higher taxes happen? If so, how will they impact your financial, retirement, and estate transfer plans? What about coronavirus? Climate change? China?

If you’re just looking at the parts, good and bad news alike seems equally difficult to process. You know each piece contributes to your overall plans … but how?

That’s where we come in. We’re here to help you discover the expansive planning space found between the extremes of exuberant and alarming news.

To review, our process begins with your financial plan and investment policy—tailored to your life’s intentions, your timeline, your tastes. Your plans plus a personalized strategy advise your well-structured, globally diversified investment portfolio. We build your “whole” to deliver a measure of the market’s most promising rewards, while protecting you against its greatest risks. Then, because nothing ever stays the same for long, we regularly revisit your plans and portfolio to incorporate any relevant news and disregard the squeaky wheels.

If we humans never took any shortcuts between discovering and reacting to breaking news, perhaps we could be more disciplined about it all. Instead, all evidence continues to confirm: Each year, each quarter, each day delivers fresh fodder in which seeds of doubt can sprout. Until the day we know exactly what the future has in store, we are honored to remain by your side, to help you make sense of the years ahead.

What goals can we help you tackle in 2022? What challenges would you like to tame? Let us know!

Ask us to show you where you stand.

Footnotes

Content provided by Dimensional Fund Advisors, LP and adapted by Open Window Financial Solutions, Ltd.