2021 in review - where should you have invested?

For my final podcast for 2021, I thought it would be interesting to look back to see how various investment asset-classes performed. This is important for two reasons. Firstly, it is wise to benchmark your investment returns so that you can assess relative performance. Secondly, it serves as a salient reminder about the cost of delay and procrastination.

Short-term returns are unimportant

In isolation, short term returns are meaningless. That’s because your focus as an investor must be on maximising medium to long term investment returns. What can I invest in today that is likely to generate the highest returns over the next 5 to 10 years? That is the question you must ask yourself.

Therefore, it’s important to highlight at the beginning of this blog that you should not put too much importance on short-term (i.e. 1 year) investment returns. Resist the temptation to guess what asset class will perform best next year. Instead, ask yourself which asset class or investment will produce the highest returns over the next 5+ years i.e. between 2022 and 2027.

Share markets

It was a year of two halves in share markets this year. The first half benefited from strong price appreciation, particularly for value stocks. The second half was adversely impacted by a few things including the risk that higher inflation may not be transitory, interest rate hikes occurring sooner than expected, central banks tapering QE and more recently, the potential impact of the new Omnicom variant.

The table below sets out returns until the end of November 2021 for the main geographical markets.

https://www.prosolution.com.au/wp-content/uploads/2021/12/Equity-market-returns-table.png

Emerging markets predominantly include China, Taiwan, South Korea and India. They have been impacted by all the concerns listed above plus many Chinese-specific matters including diplomatic and trade-related tensions, Evergrande default (that occurred last week), tech industry crackdown and economic growth concerns.

This has conspired to make emerging markets the most attractively priced sub-asset class, behind the UK market, as illustrated in the table below.

Expected returns are calculated by Research Affiliates, LLC using various evidence-based valuation models. Total return is the aggregate of income + earnings growth + change in valuation multiples.

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