While 2021 provided many twists and turns, investment portfolios primarily positioned to benefit from the economy’s re-opening fared well.  Global equities rose 18%, and those holding over 50% of their assets here enjoyed double digit returns far outpacing inflation; such has always been the best inflation defense.

A look at overall asset class returns reveals some helpful insights about the past year:

• U.S. equities/stocks (except for small-cap growth) decisively outperformed foreign equities/stocks.
• Value stocks (including overseas) saw impressive increases after their anemic gains of 2020.
• U.S. large growth stocks remained strong after also being tops in 2020 and remain tough to beat.
• Amid inflation concerns, commodities and real estate recovered sharply after their 2020 declines, seeming to peak in early Fall; interestingly, both gold and silver fell in value during 2021.
• Bonds (fixed income) suffered, especially longer-term bonds, as interest rate increases approach.

In this light, you were helped by holding more equities than normal, by our continuing emphasis on U.S. large-cap stocks (especially large growth stocks since 2017), by reductions from 2020 in U.S. small growth and emerging market levels and by keeping your bonds exclusively in very short-term holdings since early 2021.  Holding fewer equities to add popular inflation hedges would have helped returns very little.  And while inflation-protected bonds (TIPS) did have positive returns, they also have a poor track record at holding their value in severe stock market declines, thus failing in a key role for a fixed income holding.

In addition, active fund managers (‘ticker’ symbols of the form ‘ABCDX’) using a ‘value’ investment style fared particularly well versus their benchmarks, though most ‘growth’ style managers did not.  Over the last three years, however, all have shown impressive, return-enhancing results (and are watched closely).

Of course, it’s where we go from here with portfolio shifts that matters most.  Given today’s conditions for interest rates, inflation and the pandemic’s uncertainties, your portfolio’s needed changes are these:

• To protect gains, rebalance your equity (stock) allocation down to its level back in Fall 2020.
• Lower U.S. small-cap and large growth positions, as these struggle at times as interest rates rise.
• Add a real estate position, to ~3% of your equity holdings, due to solid past results when rates rise (SCHH, a low-cost exchange-traded fund that is an index for real estate investment trusts).
• Increase foreign stocks from ~25% to ~28% of equities – with a lower emerging markets portion of this – since interest rates in developed markets will stay low for longer than in the U.S., their economic recoveries have more room to run, and their stock valuations remain attractive.

We plan to make these changes to your portfolio, in a tax-efficient way, in this quarter’s coming weeks.

As always, we will be watching how markets react to each of the economic events that unfold this year.  With all wishes for a healthy and safe 2022, we thank you for the continuing opportunity to work together.