Turning the Page: What to Expect in 2021

December 14, 2020

One of my favorite lines is, ‘Predicting is hard, especially about the future.’  It’s attributed to such diverse personalities as Mark Twain, Nobel prize-winning physicist Niels Bohr, and Hall of fame catcher Yogi Berra.

A staple of December market commentaries is the outlook for the new year.  A page is turned, and experts weigh in on near term prospects for the economy and financial markets. 

Looking Back at 2020

Go back and look at predictions from a year ago.  As the saying goes, ‘How’d that work out for you?’  While point-to-point results in 2020 are pretty much in line with long term trends, it was quite the ride. We do a lot of statistical analyses on portfolios under our care.  The best and worst one-month periods for the broad markets for the last decade both occurred in 2020.  That was on nobody’s list of expectations.

Looking Ahead to 2021

Warren Buffett once said, ‘I can tell you with great confidence what will happen over the next decade, but I have no idea what will take place in the next six months.’  My time frames may not be correct, but the sentiment is.  Short term, anything can happen – and often does.  Longer term, market returns tend to be more predictable, and more highly correlated to global economic progress.  Short term variability tends to ‘wash out’ over time.  This is called ‘reversion to the mean’ – a powerful concept in both investing and the real world.

The chart below, courtesy of J.P. Morgan’s excellent Guide to the Markets, shows this.  The range of returns for stocks, bonds, and balanced portfolios narrows steadily for rolling five-, ten-, and twenty-year periods.

Going forward, the performance you see will likely be lower than that recorded over the last couple of decades.  Diversified bonds probably won’t return almost 6.0% a year when ten-year Treasuries are less than 1.0% today. Even so, while the numbers will change, the concepts in this discussion remain true.

What does this mean to you?

Very simply, focus on aligning your portfolios to meet your goals.  Ignore the short term noise (no matter how loud it is!) and concentrate on the long term results.  Talk to us; we can help.  You’ll be glad you did.