Happy Thanksgiving!

2021 has been a crazy year… not as crazy as 2020, though. For that I’m thankful. While we have done OK for our conservative clients, we have underperformed for our aggressive clients. Here are the performance numbers for various asset classes so far this year (as of 11/27/2021).

  • S&P 500: +22.76%
  • Russell 2000: +13.46%
  • Emerging Market Stocks: -5.75%
  • Gold: -6.45%
  • Commodity Index: +36.26%
  • US Long Treasuries: -4.56
  • Bitcoin: +87.27%

I did not see this coming. We didn’t have the commodity index or bitcoin in our portfolios. . . even through ETF’s. I expected inflation to be high. And, depending on how you define inflation, it has been very high in 2021. Everyone who had to buy groceries or a car or lumber or a house can attest to that. Using numbers published by Shadowstats.com, which reports inflation the way it was measured during 1980, the CPI is over 10%.

Consumer Inflation from ShadowStats.com as measured in 1980

Historically, gold and silver have done really well in inflationary times. Not this year.

Historically, high inflation has killed large cap stocks (like the S&P500), but not this year. Moderate inflation has usually benefitted small and madcap stocks like the the Russell 2000 more than large cap stocks, but not in 2020.

Historically, high inflation destroys long-term US Treasuries. This year, they are down only -4.56% year-to-date.

In 2021, a traditional 60%/40% stock bond portfolio did just fine, which was not an expected result of the inflationary environment we see. So, what happens next year, if all the “normal” historical correlations of asset classes and risk metrics do not apply?

I think the general approach to take will be a departure from traditional asset allocations. I plan to do some testing of my asset allocation methodology including some different asset classes than I’ve included in the past. Instead of broad market stock indices, I’m going to look at the stock sectors and asset classes most likely to outpace inflation, even if they are very volatile. Rather than continuing to use long term US Treasuries and bonds to offset that volatility, I’m going to look at short term T-Bills and cash. The result will likely be a conservative portfolio that has more cash and T-Bills than it used to have in Treasuries and Bonds, with less allocated to the aggressive asset classes and stock sectors. By rebalancing more frequently than traditional portfolios, I hope to use the volatility of the aggressive assets to our advantage while still doing OK if stocks just grind higher with low volatility.

In summary, conservative investors will have plenty of cash on the sidelines to take advantage of any market crashes, without having enough volatile assets to “rock the boat” very much if a crash does come along. More aggressive investors will simply have more of the aggressive volatile assets and less cash. The goal is to manage risk of a big financial crash while still having enough money in assets that can outperform inflation. I’ll keep you posted.

Dale