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Published On: December 1st, 2021

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The Financial Lessons of 2021

In this episode, Peter Mallouk and Jonathan Clements reflect on what we’ve learned this year about inflation, bonds, stock performance, NFTs and other newly popular investments. Perhaps the biggest lesson of all is you can’t guess the short-term direction of either the markets or politicians.

For their monthly tips, they offer advice on using appreciated stock for your charitable gifts and why you should let your family know the reason for any monetary gifts you give them for the holidays.

Hear more about inflation concerns: https://creativeplanning.com/education/podcast/episode-32-todays-retro-investor-worry-stagflation/

Read more about NFTs and meme stocks: https://creativeplanning.com/education/letter/spacs-nfts-and-gamestop/

Hear more about cryptocurrency: https://creativeplanning.com/education/podcast/episode-26-up-for-debate/

Hosted by Creative Planning Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!

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Jonathan Clements: Hi, this is Jonathan Clements, Director of Financial Education for Creative Planning, headquartered in Overland Park, Kansas. With me is Peter Mallouk, President of the firm. And we are Down the Middle. A month from now 2021 will be in the books. But what financial lessons have we learned from this year? Perhaps lesson number one is inflation isn’t extinct. Were you surprised, Peter, by how strongly inflation came back in 2021? And do you think it will also be as big a worry 12 months from now?

Peter Mallouk: Well, I think from 2021, I mean, we’ve talked about inflation ad nauseum on this, but it is the core economic issue of 2021 and probably will be going into 2022. I mean, there’s a lot of things that we really understand now, what’s going on with trucking, and ports, and people retiring early, and immigration and all of the things that are resulting in a labor shortage and supply chain issues. But I think some of this is going to carry forward into 2022. And I think that the main thing that’ll carry forward is its clear that we don’t have the virus under control. And even though in the United States more than 70% of people are vaccinated, the average thing that comes to the United States has parts made in 10 different countries. And a lot of these countries don’t have COVID under control.

And so as long as we have COVID causing problems all over the world, it is by itself going to create supply chain issues, which has an impact on inflation. I also think we have this flood of stimulus money coming in, in the form of infrastructure that will drive inflation. But, at the end of the day, over the long run, whether it’s a year from now, two or three, if Republicans and Democrats can just control spending just a little, technology is going to bring long-term inflation under control. I mean, technology creates efficiencies that drive inflation down. And so I think we’ll eventually see that deceleration of inflation, but it’s going to take a little longer than I think everyone expected.

Jonathan: So, beyond the reminder about inflation and the fact that it is far from dead, I think one of the reminders for investors is that it’s important to think in terms of real returns. Almost everybody with the savings account, almost everybody who’s an investor in high quality bonds has realized this year that you’re not making money once you factor in inflation, and you’re definitely not making money once you factor in inflation and taxes. So for everybody who wants to make their wealth growth over time, the default investment option becomes stocks because nothing else is offering you that real return, over and above the inflation rate.

And these other investments, cash investments, bonds, yeah, they’re great for portfolio insurance, but not a great way to build your wealth. So of course, thinking of bonds, another reminder from 2021, interest rates can actually go up, which feels odd after four decades of declining interest rates. While almost every category of stock fund has posted a gain so far this year, almost every category of bond fund has suffered losses. Do you think investors should be prepared for more of the same in 2022, Peter, or is this rise in rates a temporary thing?

Peter: I think the long bull market run in bonds is over. I mean, bonds are just loans. 99% of a bond’s returns is the yield from the bond. It’s a very simple rule and I think a lot of people don’t understand it. 99% of what you should expect from your bond portfolio is look at the interest rate on the bonds you’re getting and that’s what you should expect. And 80% of bonds are paying less than 2%. And what can inflate the value of a bond, besides the yield, is if interest rates go down, your bonds are more valuable, because they’re paying more. And the probability of rates going down versus up is low. It’s possible we have negative yields across parts of the world, including parts of Europe. So it’s possible for interest rates to go down, kind of have to construct a narrative for it to happen.

Can they go down significantly? The answer is no. So it’s definitely asymmetric risk there. To your point, the only reason an investor should have bonds is to have a place to go in the time of crisis and there will be a time of crisis.

That’s the other thing that’s not normal about this year is the typical drawdown in the market is 14%. If we go back to no 1926, it’s 16%, meaning from top to bottom, somewhere in the year, the market goes down 14 to 16%. This year that hasn’t happened, nothing even remotely close. When that does happen, usually the bond part of a portfolio goes up, or at least maintains its value, giving someone a place to go in the event of a crisis. That’s really the way to look at bonds now. And really the way we’ve looked at bonds at Creative Planning from the beginning. We expect stocks to do better than bonds. We only own bonds as portfolio coverage over the short-to-intermediate run.

Jonathan: So yeah, you bring up the stock market and I think, for a lot of people, one of the big surprises of 2021 is how well the stock market has done following the surprisingly strong gains in 2020. In fact, as things stand, stocks have done better in 2021 than they did in 2020. It’s a reminder, at least to me, once again, that nobody can figure out where the stock market is headed in the short