Quarterly Client Letter -- 2021 Q4

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 quarterly reports in this context. In terms of fruitful investing, 2021 markets offered a bumper crop of seemingly easy pickings. Crediting “a highly speculative, risk-complacent market driven by a combination of near-zero interest rates, abundant capital and a healthy dose of hype,” Financial Post columnist Tom Bradley summarized the year as follows: “[W]e’re at a point in the business cycle when the disc jockey is playing Shout by the Isley Brothers and investors can’t stop dancing.”

• 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 ETF 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 ETF 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.”
• From options trading, to IPOs, to tech stock bets, one aggressively active investment company president declared 2021 as “the year of the risk asset. … Anywhere there was risk and an opportunity for larger returns, we saw that pay off in spades.”

On the flip side, there’s been no lack of attention to the ubiquitous snakes in the grass. 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 statement—tailored to your life’s goals, your timeline, your tastes and aversions. Your plans plus an evidence-based 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 help you 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 less 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!

Regards,

Excel Financial