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Ten Tips for 2021

John Lim  |  December 30, 2020

‘TIS THE SEASON for making predictions and financial recommendations for the year ahead. Since everyone else is doing it, I figured I’d hop on the bandwagon. Here are my 10 predictions and recommendations for 2021:

1. The stock market will fluctuate, but company dividends will be relatively stable.

John Pierpont Morgan was asked what the stock market would do next. According to legend, he answered, “It will fluctuate.” If only financial experts were so truthful today.

There’s no doubt that stocks will fluctuate next year, perhaps wildly. I don’t pretend to know whether the market will end 2021 in the black or the red. But there’s one thing you can count on: Company dividends will be much more stable than share prices.

In the early 1980s, Nobel laureate Robert Shiller pointed out this phenomenon, noting that—since a stock’s value fundamentally reflects the present value of its future dividends—the wild stock price swings made little sense. Keep that in mind the next time the market throws a tantrum.

2. Wall Street forecasts will be bullish for 2021.

You can be sure of two things. First, Wall Street will be bullish on the stock market for 2021 (and 2022 and 2023…). After all, a COVID-19 vaccine is becoming available. Employment is recovering. There’s plenty of pent-up demand. The list is endless.

The other thing you can count on: The forecasts are worthless. In fact, they’re worth less than nothing. Acting on stock market predictions from Wall Street strategists or anyone else is a surefire way to lose money.

3. Short-term interest rates will remain very low in 2021.

It would usually be hazardous to predict the direction of interest rates. But the Federal Reserve has told us on more than one occasion that, in effect, “We aren’t thinking about raising rates. In fact, we aren’t even thinking about thinking about raising rates.”

The implication: Don’t expect to earn much from your savings account or money market fund in 2021. So why hold cash investments? I view cash not so much as an investment, but as financial valium and as an option on market volatility. As we saw earlier this year, cash can become quite valuable when investors panic. It could become valuable again.

4. Money will flow into the best-performing asset classes.

If there’s one thing you can count on, it’s that investors are always looking in the rearview mirror. What does this mean for 2021? More than likely, they will be selling value stocks and buying growth, while also dumping international stocks and plowing the proceeds into U.S. stocks.

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Common advice from financial institutions is to invest about 25% of your stock market money internationally. That must mean the U.S. represents about 75% of global GDP, right? Just the opposite is true. The International Monetary Fund estimates that U.S. GDP is currently 25% of global GDP. But given the decade-long outperformance of U.S. stocks relative to the rest of the world, don’t expect most investors to give international shares a second look in 2021.

5. The more often you look at your portfolio, the worse your investment results will be.

Want to improve your portfolio’s performance in 2021? Stop checking your investments. The more often you look, the more often you’ll see losses. Even if you see losses half the time and gains the other half, the losses will weigh heavier on your psyche. Such myopic loss aversion has a host of ill effects, not least of which is a lower risk tolerance.

6. Life will not return to normal.

The news on the COVID-19 vaccine is encouraging. We may finally get a handle on the global pandemic in 2021. But don’t expect life to return to normal. For example, I doubt that the “work from home” trend is going away. I don’t pretend to know all the investment ramifications of these changes, but that’s okay, because no one else does, either.

7. Consider a partial Roth conversion.

Federal income tax rates remain near historic lows. If your taxable income is low next year—say you’re retired but haven’t yet claimed Social Security and aren’t yet required to take distributions from your retirement accounts—converting part of your traditional IRA to a Roth makes a lot of sense. If you have no other taxable income in 2021, you could convert $53,075 if you’re single and $106,150 if you’re married filing jointly, and stay within the 12% marginal federal tax bracket.

8. Get a guaranteed 100% return in 2021.

Contribute enough to your 401(k) or 403(b) to get the full employer match and that 100% return is yours, assuming your employer offers a dollar-for-dollar match. Kudos to the federal government’s Thrift Savings Plan (TSP) for recently implementing a 5% automatic enrollment percentage for new workers. As a result, new federal employees will get the full TSP match from the government, unless they opt out of contributing.

9. If you’re relatively healthy, sign up for a high-deductible health plan.

I was astonished by how much I could save by switching to a high-deductible health plan, which meant I was eligible to fund a health savings account—the most tax-favored investment account available today. Everyone’s situation is different and you need to run the numbers, but my analysis showed me saving nearly $7,000 a year through lower premiums and lower taxes. There’s always some uncertainty around such a decision, but the numbers were too compelling for me to ignore.

10. The price of bitcoin will remain volatile.

Some things are just self-evident.

John Lim is a physician and author of “How to Raise Your Child’s Financial IQ,” which is available as both a free PDF and a Kindle edition. His previous articles include Evasive ActionMy Bad and Six Lessons. Follow John on Twitter @JohnTLim.

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