Next Year Foretold

Jonathan Clements

THE MARKETS AREN’T predictable—but the talking heads sure are. Like a dog with a favorite fire hydrant, financial commentators return to the same themes again and again.

The silver lining: There’s no need to waste hundreds of hours in 2021 reading the business section and watching financial news channels, because we already know what the pundits will be saying next year—and probably the year after that and the year after that. Look for these seven stories in 2021:

1. Stocks are going to crash. We all know nobody can predict the stock market’s short-term direction, so why do some pundits insist on making frightening market forecasts? They know it’ll get them media attention—and the more extreme the prediction, the more likely they are to get coverage.

The more intriguing question: Why do we listen to these folks, even though we know they’re almost certain to be wrong? Partly, it’s because optimism strikes us as naïve, while pessimism seems sophisticated. But perhaps more important, such dire predictions trigger our hardwired fear of losses—and we can’t help but sit up and take notice, even though we know better.

2. Interest rates are set to soar. I remember a financial advisor telling me that he liked immediate fixed annuities, but he’d like them even more if interest rates were higher. “I could see buying them for clients,” the advisor said. “But I’d want to wait for higher interest rates.”

That might seem like a reasonable thing to say—except the advisor told me that more than two decades ago, when I was writing for The Wall Street Journal. At the time, 10-year Treasury note yields were six times higher than today’s level.

The implication: Instead of acting on predictions of higher interest rates—which may or may not come to pass—we should each allow for that risk in our portfolio’s design. My advice: Make sure the time to maturity of your bonds—or, better still, their duration—bears some relationship to your investment time horizon. Fund company websites often report the maturity and duration for the bonds held in their funds.

If you’ll need money from your portfolio in the next five years, favor bonds and bond funds with a duration of five years or less for that chunk of money. What if you’ll need money in the next 12 months? Go for cash investments.

3. Inflation will come roaring back. Like rising interest rates, the return of inflation is frequently forecast—and yet consumer prices stubbornly refuse to cooperate. To be sure, we have a ballooning federal budget deficit and we’ve seen huge increases in the money supply. But despite that, inflation has remained quiescent.

More important, the collective opinion of investors, as reflected in the difference between the yield on 10-year Treasury notes and that on 10-year inflation-indexed Treasurys, suggests folks see scant signs of inflation’s return. Right now, that yield difference indicates inflation will run at 1.9% a year over the next 10 years. What if investors are collectively wrong? In all likelihood, your portfolio is already well-prepared, because you have a healthy allocation to stocks—and stocks have a proven history of outpacing inflation over the long run.

4. Target-date funds are terrible. Yes, these funds—which offer a diversified portfolio in a single mutual fund—can suffer steep short-term losses, just like any other investment exposed to stock market swings. Yes, by putting together your own investment mix, you may be able to build a lower-cost, more tax-efficient portfolio that’s better suited to your personal situation. Yes, some fund companies load up their target-date retirement funds with actively managed funds with steep expense ratios.

Still, a target-date fund—especially if it’s one of the low-cost, index fund-based offerings from Charles Schwab, Fidelity Investments or Vanguard Group—is a great option for folks who aren’t interested in investing and don’t have enough wealth to command the attention of a talented, fee-based financial advisor. So why do financial advisors regularly deride target-date funds? They fear losing clients to these funds—and the fact is, they should be fearful if all they’re doing for clients is building portfolios of mutual funds, without offering robust help with insurance, estate planning, taxes, financial planning and other aspect of a client’s broader financial life.

I don’t own any target-date retirement funds, except in one small account. But if Vanguard ever offers Admiral pricing on its target-date funds, I’d likely swap over much or all of my retirement accounts to a Vanguard target fund and thereafter leave the driving to the fine folks in Malvern, Pennsylvania.

5. Index funds are doomed. Do you recall investment manager Michael Burry’s 2019 claim that index funds are in a bubble? Apocalyptic predictions like that have been made for decades, and yet index funds keep trucking along and active managers keep lagging behind. But have no fear: The facts won’t prevail—and 2021 will surely bring yet another self-interested screed against index funds from an active manager hoping for 15 minutes of fame.

Before you get too bothered by such nonsense, think on this: An index fund that weights stocks by their market capitalization owns those stocks in the exact same percentage as all active investors. In other words, as the owner of market cap-weighted index funds, you’re invested in the same stocks as these other folks—only you own them for a fraction of the cost, which is why you’re guaranteed to beat most active investors over the long haul.

6. Everyday investors are buying—so you shouldn’t. Remember all the handwringing earlier this year over millennials buying and selling stocks in their Robinhood accounts? According to the talking heads, this supposedly was a sign that the market was frothy and soon to crash.

Such commentary might have made sense decades ago, when individual investors were a big trading presence in the stock market. But it makes no sense today, now that professional investors account for perhaps 90% of daily trading volume and probably more. Cboe Global Markets puts total U.S. stock market trading at around $500 billion a day. Set against that, your delusional nephew with his $2,000 Robinhood account may not be doing himself any good—but he sure isn’t driving share prices to silly heights or telling you anything about the market’s likely direction.

Indeed, it seems the overriding goal of Wall Street’s talking heads is to belittle everyday investors, no matter what we’re doing. In one breath, the pundits tell us that everyday investors are being stupid in the way they actively manage their investments. In the next breath, the pundits tell us that everyday investors are hurting the market’s efficiency by not actively managing their portfolios and instead indexing. C’mon, boys and girls, how about a little intellectual consistency?

7. Social Security recipients won’t be getting much of a raise. Every year, media outlets report how much Social Security benefits will rise in the year ahead. The stories are usually accompanied by the suggestion that seniors are somehow being shortchanged—and, in the social media commentary that follows, there are often political attacks on Congress and the president.

This is beyond silly. The annual increase in Social Security benefits is determined by a formula, not a political vote. More important, it’s designed to ensure benefits keep up with inflation. What if the increase in benefits is modest? That means inflation is modest—and thus seniors are simply being made whole, nothing more, nothing less.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Dialed InAin’t Everything and Bad Influence.

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