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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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David Schlesinger
David Schlesinger
9 months ago

Re your point #4 – I pay 0.13% on my vanguard target fund. That’s pretty damn low! True I pay .03% for VTI but honestly an “extra” $1,000 per million invested to have Vanguard do the constant rebalancing is worth it for me – mostly because I am usually much slower to change my asset allocation so probably lose at least that amount to bad allocation in the part of my portfolio I manage myself!

IAD
IAD
9 months ago

Thats the thing with Vanguard. We can argue over costs but even the highest cost fund is often lower than funds in other families. I’m loyal to Vanguard for that very reason.

Ocher
Ocher
9 months ago

In my employer sponsored plan, I pay 0.08% fees on a Fidelity target date fund. in the next few months I’m planning on moving more of my 403(b) retirement funds from an actively managed account with 1.14% fees. Currently I have 2/3 of my retirement accounts in actively managed funds and 1/3 in Fidelity target date fund. I’m retiring in a month.

Ocher
Ocher
9 months ago

Thoughtful commentary this morning. Thanks for reminding us about some enduring narratives about investments and retirement. What is “Admiral” pricing that you referred to when discussing Vanguard’s target date funds?

Jonathan Clements
Jonathan Clements
9 months ago
Reply to  Ocher

For everyday investors, Vanguard has two classes of shares — Investor shares and Admiral shares. The latter have a higher investment minimum, but also lower annual expenses. The upshot: You could replicate a Vanguard target fund using Vanguard’s Admiral shares and have an investment mix with notably lower annual expenses.

Steve Spinella
Steve Spinella
9 months ago

Can we also say, by extension, that Jonathan Clements will be writing very similar articles to this one in December 2021? Perhaps you should flag it in your calendar and revisit it every year, just for fun.

Jonathan Clements
Jonathan Clements
9 months ago
Reply to  Steve Spinella

In the past, I’ve often joked that there are only 20 personal finance stories, which means that — by the time I quit the WSJ for the first time after writing 1,000-plus columns — I’d written each of those stories 50 times.

Ellen
Ellen
9 months ago

Thank you, Jonathan! This is just what I needed to hear! I’ve been following your wise, intelligent work for nearly 30 years now; bless your contributions to the finance community!

Thomas
Thomas
9 months ago

I concur with all points except for the statement that social security keeps up with inflation. The social security cost of living adjustment is indexed to the Consumer Price Index for All Urban Consumers (CPI-U). This index represents typical spending patterns of working aged adults living in cities. Older adults have different and unique spending patterns, and healthcare expenses make up a much bigger portion of their budget. And as we all know, healthcare expenses have risen at a greatly accelerated rate relative to overall inflation.

Jonathan Clements
Jonathan Clements
9 months ago
Reply to  Thomas

Maybe. The BLS has an index, CPI-E, that tracks inflation as experienced by seniors. For some reason, the data is only available sporadically. Still, it indicates that inflation as experienced by seniors isn’t that much faster than inflation as experienced by the broad population:

https://humbledollar.com/money-guide/inflation-2/

wtfwjtd
wtfwjtd
9 months ago

Point #7 especially makes me smile. “Seniors are finally getting the (generous) Social Security cost of living adjustment that they deserve” reads no headline, ever. Yeah, I get it, COLAs are inherently boring, and no one wants to read about the status quo. And yet,a headline that reads “Congress proposes modest tax increase to make Social Security benefits more generous” would generate an equally negative reaction, though likely from a different segment of the audience. It’s almost as if we can’t decide what we really want, and are hunting for a scapegoat for our own poor planning, conflicted priorities, and indecision. Nah, couldn’t be…

David J. Kupstas
David J. Kupstas
9 months ago

While the pundits may say the market is going to crash, every advisor I’ve ever heard or read thinks it’ll go up like 8 or 10% next year. While there may be a crash down the road, it’s never going to be right away. It’s not going to soar, it’s not going to crash. It’s going to be around 8 or 10% up.

Roboticus Aquarius
Roboticus Aquarius
9 months ago

Great post Jonathan!

Regarding SS and healthcare costs: I don’t believe anyone is being shortchanged by SS either, but I think it is good to have data. Senior spending per capita is a bit more than 2.5x what working age people pay per capita (at least it was in 2014), so I imagine that medicine will sometimes eat up more than the COLA. The CPI-E to CPI-W gap is about 25 bpts annually which translates to perhaps $300 per year after 5 years of retirement if my math is on target for the average recipient who receives perhaps $1300 per month. Anyways, it’s a modest gap, but it can grow to be decent size for someone surviving on SS alone, especially if they do so for 30 years.
Like you, I imagine the issue is overblown, but I do suspect there are some few individuals out there who do see their SS outpaced by medical costs.

Point of interest, a lot of the growth in healthcare cost appears to be absorbed by business, gov’t and other: Individual out of pocket expenses have declined from 37% or so in 1970 to about 10% today, while total per capita spending has grown 6x (or more by some estimates) over that time in constant dollars. Interesting magic trick there, as constant dollar out of pocket costs have apparently doubled over 50 years, when you smash those figures together. However, total cost growth is so much more and yet invisible to most of us.

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