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Q4 2021 Review:  What to do in 2022?   Thumbnail

Q4 2021 Review: What to do in 2022?

What to Do in 2022

 Last January I wrote a column after an exceptionally difficult and divisive 2020 and a very rough start to 2021. Unfortunately, as I look back on the completion of 2021 it does not appear that the fraying of our social fabric has improved any in the completed year. 

In addition, there are some unique economic challenges to investing as we start this new year. For example, who could have guessed that we could have a ten-year treasury yielding only 1.8% with inflation at seven percent? (a NEGATIVE real yield of 5.2 percent!)  I acknowledge – not I…

But the reality is that if the Fed increases interest rates to the extent which would surely slow down inflation (a ten-year yield above the current rate of inflation) it would wreak political suicide for those currently in power. Since nine percent of our tax dollars goes to service the debt interest payments, a four-fold increase in interest rates would necessarily also mean a ~30% increase in taxes just to continue as we currently are, NOT to actually pay down the debt!

Two acronyms come to mind as I attempt to summarize 2021: TINA and FOMO. For those of you not familiar with these acronyms I’ll briefly describe each why they are being used regularly in the current investing lexicon: 

TINA: There Is No Alternative. This acronym is used to describe why we continue to buy stocks at current exceptionally high historical prices. Why is there no alternative? It’s because bonds are currently providing a negative real (after inflation) yield of over five percent. Cash alternatives are negative seven percent. Real estate? Try making money on an asset dependent on low interest rates when the Fed has made it crystal clear they intend to raise rates. Crypto? Do you want to own something that has no intrinsic value just because it’s gone up recently? (more on this in FOMO). The thought process goes something like this: among competing alternatives, stocks are the best compared to unattractive alternatives. 

FOMO: Fear Of Missing Out. This probably best describes manias in the past – whether it be the mania for tulip bulbs in Holland in the 1600’s or tech stocks in the late 90’s. Essentially people see or hear of friends or neighbors getting rich and don’t want to be left out. They buy an asset not based on intrinsic value but rather as a means of assuaging their own angst about being left behind. I will leave it to a future newsletter to address whether FOMO applies to certain “assets” like cryptocurrencies.

I acknowledge that this is not an ideal set of circumstances, but we do not get to choose the times in which we live – but rather we need to successfully navigate the one we live in… 

How to proceed in 2022 during all the “uniqueness” and “challenges”? Again, its:

1)     Put the vast majority of your investable assets in stocks and bonds (mostly stocks if you have the stomach). This is your “PLAN for the probable”. 

2)     Take a 5-10% portion of your assets to PREPARE (not plan) for emergencies and worst-case scenarios. This includes food and water storage, paying off debt, and owning some physical precious metals. These measures are “preparation for the possible”. 

As interest rates go up in 2022 there will be some significant changes to “leadership” in the financial markets.  Historically, companies with attractive current (as opposed to future) earnings do much better in such an environment. We call these value stocks. In addition, international and emerging market companies are comparatively much more attractively priced than the stocks which have driven US markets over the last 10 years.