Portfolio Lessons From 2021

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. As 2021 winds down, what lessons can investors take away from this past year? Joining me to share some insights is Christine Benz. She is Morningstar's director of personal finance and retirement planning.

Christine, nice to see you.

Christine Benz: Good to see you, too, Susan.

Dziubinski: You see that one takeaway from this past year is this idea that the "TINA theory" is alive and well. So, first, talk a little bit about what the TINA theory is for those who might not be familiar with it and why you think that explains a lot of the market action this year.

Benz: Right. TINA is "there is no alternative." And for a while now that has been floated as an underpinning for this bull market that won't quit. The fact that we have very low cash yields, very low bond yields, the alternatives just are not compelling, and so, stocks have continued to go up and up and up. And I do think that that's a possible explainer for 2021 as well because, from a lot of standpoints, the market looked pretty expensive coming into this year and yet it has continued to go up, I think, in part because when investors are thinking about growth for their long-term assets and they're looking at the very low yields on safe assets, they're just not seeing them there, and so they're putting money into stocks.

Dziubinski: Related to that then, another lesson from this past year has been that, really, valuation isn't always predictive.

Benz: That's right. So, not only did valuation argue for the whole market being somewhat expensive coming into 2021, but certain pockets of the market looked especially expensive. So, U.S. large-cap growth looked expensive, especially expensive, whereas value stocks looked cheap. And indeed, value stocks have had a really great recovery. But what we haven't seen yet is the long-awaited recovery in foreign stocks relative to U.S. U.S. stocks definitely look more expensive relative to non-U.S. names, but yet we've continued to see U.S. stocks outperform. I think valuation over long periods of time is a good predictor of where to place your bets, but over short periods of time, there may be dislocations and there may be painful periods for contrarians.

Dziubinski: Another takeaway is that if you wait to see signs of inflation before purchasing some sort of inflation protection, it might be too late.

Benz: That's right. And I think we've seen that on full display so far in 2021, where the really worrisome signs about inflation have come within the past few months, where you've started to see very dramatic jumps up in CPI. Well, the real inflation-protected securities, whether Treasury Inflation-Protected Securities or commodities, those were rallying in the first half, even in that April period when we saw the first glimmers of inflation. So, my bias is to maintain inflation protection in a portfolio on an ongoing basis. Now, the type of inflation protection that you maintain I do think depends on your life stage. So, if you're a young investor, hold stocks, and if you're an older investor, hold stocks, too, but also hold a little bit of Treasury Inflation-Protected Securities if you have fixed-income exposure, but don't run and try to buy them after we've already begun to see worrisome signs about inflation. You're often a day late and a dollar short in those situations.

Dziubinski: Christine, let's talk a little bit about some of the types of securities that have been pretty good inflation hedges during this period. How should investors think about them in their portfolios?

Benz: Right. Commodities have been tremendous performers so far this year where we've seen just stratospheric gains, 50% gains on some commodities, futures tracking funds. I would not recommend them for most people, mainly because they're incredibly volatile as stand-alone investments, and investors just tend to lose patience with them during their long troughs and then they often buy high. We've seen Treasury Inflation-Protected Securities perform well during this period. I think they're a really nice long-term inflation hedge, especially for retirees who are drawing from their portfolios who have fixed-rate investments; I think it's nice to add a sleeve of TIPS alongside them. Gold we have not seen perform particularly well, and that's in keeping with other performance patterns. During other inflationary environments, gold has often held out as a thing to own when inflation is on the rise. It's really been pretty erratic so far this year, and there have been a few reasons floated. Maybe it's that bitcoin has caught some of those natural gold investors' attention. But we just haven't seen gold perform particularly consistently as an inflation hedge, and that's been the case in 2021 as well.

Dziubinski: Now, you mentioned retirees, and you're a big proponent of a bucket approach to asset allocation in retirement. What lesson can bucket investors take away from this past year?

Benz: Well, I think, the key one is, if you are maintaining safe assets that you'll draw upon for living expenses, the key message is: The market has been great; reap some of those profits in your high-returning equities, steer them into safe assets, and, by having those safe assets set aside, you can really rest comfortably if stocks do eventually continue this pattern of volatility. You'll know that you've set aside your portfolio withdrawals for the next couple of years because you've harvested some of those gains. So, that's the key one that I would impart for people using this bucket strategy. It's a good time to refill that Bucket 1, that cash bucket, and use your highly appreciated equity assets to do so.

Dziubinski: Well, thank you so much for your time today for your perspective on 2021 and some portfolio takeaways for all of us. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.