A Look Ahead: 2021 and Beyond

We are still in a bit of shock as we look back over the events of 2020.  The virus warrants top mention, of course, but there were so many other moments that would have been extraordinary in any other year.  The never-ending wildfires in the western part of America, the murder of George Floyd and the international awakening around racial justice issues and the most contentious Presidential election in history.  The outcome of the Georgia Senate election will be key to President-elect Biden’s ability to implement the priorities of his administration.

Many investors attempt to time the stock market.  2020 has many examples of why that is truly so difficult.  Had we held an online meeting at the end of March and told our clients we believed the stock market would be at all-time highs by year-end we would have been met with much skepticism, yet here we are.

Challenges

We enter 2021 with record low interest rates and stocks trading at all-time highs.  Bonds and cash are providing very low yields and stocks look due for a correction (which is healthy and part of investing).  With high quality bonds yielding about 2% and cash earning almost nothing, portfolio returns over the next few years will lean heavily on stock market returns. 

Opportunities

Domestic growth stocks and most bonds seem to be expensive, while value stocks and international stocks most likely offer the best opportunities over the next few years for better returns.  We will continue to invest client portfolios within the risk guidelines we have set up with each of our clients.  Even if we are able to align the portfolios with perfect foresight over the next few years (which we won’t) it will be difficult to achieve the types of returns we have in the past without taking on more risk.  This is especially true for those portfolios conservatively or moderately invested since they have more invested in cash and bonds than more growth-oriented portfolios.  The more traditional, balanced portfolios will struggle until the interest rate environment increases, which is dependent upon economic growth and inflation. 

Patience

We will continue to do our utmost to help our clients reach their goals, however the next few years will require patience.  Not only will returns on cash and bonds likely be more subdued, but it is also likely that stock market returns will remain volatile as the global economy recovers from the virus.  Interest rates have been in steady decline since most of us have been investing and bonds and cash have been a good source of returns during the past 35 years.  Going forward, returns on fixed income will be a headwind for the next several years, at least.  We will reallocate portfolios over time as the interest rate environment changes.  For now, we have been increasing allocations to cash and short-term bonds while reducing exposure to long-term bonds as a defensive hedge against rising interest rates.  We do not believe the extra yield for longer term is currently enough to make owning a large amount of those bonds attractive at this point.  After interest rates rise, the risk/reward profile on longer term bonds will look better and we will start adding to these holdings over time.

Over the past 38 years our firm and our clients have benefited from diversified portfolios managed within individualized risk and return objectives.  We believe this approach to investing is timeless and will continue to benefit our clients for decades to come.

The Bond&Devick Team