- Top 10 Investing Trends of 2021
- 1. The Biden Impact
- 2. Beginning of the End of Covid-19
- 3. Covid-19 Vaccine to Boost Pharmaceutical Stocks
- 4. Pent-up Demand for Travel Stocks
- 5. Hunger for Restaurant Stocks
- 6. Beware the Work from Home Stocks
- 7. Be Mindful of the Rotation
- 8. Slowing Tech Stocks
- 9. FAANG Stocks Are Long in the Tooth
- 10. Don’t Overreact to the News, But Be Ready for the Unexpected
- Retirement: How much are you willing to lose?
- Key findings
- Historical returns don’t promise future returns
- Millennials can embrace their long time horizons
- Keeping retirement savings the market wastes hard-earned dollars
- Diversification and appropriate asset allocation significantly reduce risk
- Busting some common investing myths
Top 10 Investing Trends of 2021
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It’s hard to imagine a more dramatic roller-coaster ride for investors than the year 2020. The Covid-19 whipsaw felt the Great Recession and the Dot Com Bubble wrapped together and compressed into 12 months. That experience should provide a lesson for investors in 2021:
Predicting the future is a risky game.
“The S&P 500 dropped over 33% in March, we just went through a contested presidential election, and we’re still in the midst of a global pandemic that is only getting worse. And yet the S&P 500 has been hitting all-time highs.
No one could have foreseen that, and no one knows what 2021 will bring,” says Kansas-based financial planner Desmond Henry. “If 2020 has proved anything, it’s that the market is impossible to predict, so that’s why I don’t try.
If anything, 2020 should teach investors that well-established principles, investing for the long-term with a low-cost diversified portfolio and only checking your investment balance occasionally, are the best advice.
“I advise my clients not to get caught up in the latest hot stocks, sectors, or investment trends, Henry says.
If you panicked when the market dipped in March and sold your investments, you’d have missed out on a full recovery—including 60% growth since March’s nadir. That’s why Henry recommends clients “keep a well-diversified portfolio to weather whatever the markets bring next rather than trying to predict what’s going to happen next.”
Still, it’s impossible to ignore the trends that may impact investors in 2021. Here are the top ten trends that may affect the stock market and your investments in the new year.
1. The Biden Impact
January will be dominated by news of the incoming Biden administration. Plenty has been written about President-elect Joe Biden’s plan to raise taxes on the wealthy and its potential impact on stocks. But the market reacted favorably to Biden’s apparent victory on election night and continued to rally as the election results became clearer in the following days.
While Wall Street initially seemed to hope for a blue wave, the market’s recent performance seems to show it also s gridlock, meaning the markets will probably react favorably regardless of the outcomes of Georgia’s run-off U.S. Senate races.
2. Beginning of the End of Covid-19
The approval and gradual distribution of Covid-19 vaccines will be a major obsession in early and mid 2021. Will the vaccines work as advertised? Will they be rapidly distributed around the country and around the world?
There will be inevitable hiccups. But as better weather returns to the U.S., normalcy could begin to gradually return. At the same time, markets will be watching for Congress to pass additional stimulus to provide a lifeline for small businesses and consumers until vaccines really start to slow the spread of the virus.
How quickly the pandemic fades will have enormous macro economic impacts, and these will hit every single investment sector. Some will be more obvious than others, so they each merits their own discussion.
3. Covid-19 Vaccine to Boost Pharmaceutical Stocks
If the pharmaceutical industry manages to get Covid-19 under control during 2021, it will be a triumph for science. Public companies involved in the effort will be handsomely rewarded.
Some winners will be obvious, vaccine makers Pfizer (PFE) or Moderna (MRNA)—but companies working on therapeutic drugs Regeneron (REGN) will benefit, too.
There will be less obvious winners, too. Just one example: Distributing the vaccine will require an enormous logistics effort. Some vaccines require well-below-freezing transport, for example, so firms that sell cooling technology stand to benefit.
4. Pent-up Demand for Travel Stocks
Plenty of other sectors are set to jump if the world starts returning to normal in 2021. Pent-up demand for travel could drive a gold rush for long-punished airline stocks, hotels and even cruise lines.
And all that increased economic activity will do wonders for hard-hit tourist cities around the country and around the world, too. How much? Seth Carpenter, chief U.S. economist at UBS, predicted in November that early vaccine successes could mean near-zero Covid cases in the U.S. before summer, which would add 1 to 1.25% to U.S. GDP.
5. Hunger for Restaurant Stocks
Fast casual restaurant chains are set to benefit from the potential return to normality. Many have limped along with take-out orders—but on the day Pfizer announced its vaccine had 90% efficacy in Phase 3 trialsl, there was a widespread rally among chain restaurants, representing almost every kind of cuisine.
To offer just a sample platter: Darden (Olive Garden and Longhorn Steakhouse) (DRI), Ruth’s Chris Hospitality Group (RUTH), Cracker Barrel (CBRL), Cheesecake Factory (CAKE), Denny’s (DENN) and Dave & Buster’s (PLAY) all saw double-digit percent gains that day.
6. Beware the Work from Home Stocks
On the other hand, plenty of firms that saw surprising gains in 2020 might be imperiled by a potential return to normalcy after Covid-19. We also got a taste of this with Pfizer’s announced breakthrough vaccine trial. Work-from-home darling Zoom (ZM) lost nearly 20% at one point.
Food delivery services fell sharply, too, as did similar stocks.
Zoom isn’t going anywhere, and neither is the work-from-home crowd. But that November day should be a cautionary tale that growth in this sector is probably entering a new phase.
7. Be Mindful of the Rotation
New investing phases are normal. In the stock market, they are called “rotations.” Money runs after gains in certain sectors until a rally there becomes exhausted, and then money runs to other sectors.
It’s not uncommon for a surge in high-risk / high-reward tech investment to be followed by a rush to boring utility stocks. It’s ly that investors will rotate into different sectors in 2021.
8. Slowing Tech Stocks
Analysts have long predicted a slowdown in tech stocks, which had an excellent year in 2020—so well that the B word for bubble was frequently bandied about in market coverage.
The long bull market for tech stocks is bound to end eventually. Factors that could be in play in 2021 include the potential for messy antitrust litigation against Google (GOOG) and other tech giants.
It’s unclear how a Biden administration will handle the Trump administration’s lawsuit against Google.
But there seems little doubt that state attorneys general will continue to pursue litigation against giant tech firms.
9. FAANG Stocks Are Long in the Tooth
The slowing tech and rotation trends both lead us to the FAANG stocks and their outsized market impact over recent years. FAANG is a Wall Street nickname for (), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google (now called Alphabet)—athough Microsoft (MSFT) is sometimes substituted for Netflix to make FAAMG.
However you name it, this basket of tech giants represent about 20% of the value of the S&P 500. More important, during 2020 they represented a giant portion of the gains seen in the S&P 500.
By the end of November, for example, the S&P 500 was up about 13% for the year. But Microsoft and Google were up 36% each, was up 40%, Netflix was up 55%, Apple was up 67% and Amazon was over 70%.
It’s a good bet that this story could change in 2021. What remains to be seen is if the FAANG names can continue to rise rocket ships. If they don’t, will investors look to rotate their money into other tech stocks or into other sectors? Or will stagnated FAANG growth drag down the broader market?
News in any direction could have large implications for your investment portfolio.
10. Don’t Overreact to the News, But Be Ready for the Unexpected
Predictions are hard, but it’s easy to predict something unexpected will happen in 2021. That’s why the most important advice is to avoid the temptation to over-focus on the short term.
“I believe in focusing on your goals and working back from there versus reacting,” says certified financial planner (CFP) Bobbi Rebell, host of the Financial Grownup podcast. “So no change driven by outside factors,” the events you might hear about in the news.
The new year also offers investors a chance to take stock of how they handled the unexpected events of the past 12 months and consider making changes, she says.
“Do you have enough savings that are liquid for things …a pandemic?” says Rebell. If not, it might be time to bulk up your emergency savings. And if you found yourself overly stressed or panic selling over the past year, you may want to adjust your investment strategies to include more fixed-income investments in the new year.
In a world where uncertainty is more a feature than a bug, it’s important to be prepared for market highs and lows, even within the span of the same year. While one can hope nothing as dramatic as a pandemic hits in 2021, Henry expects investors should be ready for another roller-coaster ride next year.
“One reality that I think investors need to become more comfortable with is increased volatility in their investment portfolios. While 2020 is an outlier in terms of the wild ups and downs, volatility is something every investor is going to have to get used to,” he says.
The best way for most investors to handle volatility is a diversified portfolio of exchange-traded funds (ETFs) tailored to your goal timeline and risk tolerance.
Retirement: How much are you willing to lose?
By Arielle O'Shea and Stephane Lesaffre
Research suggests millennials have largely resisted investing, instead favoring “safe” vehicles savings accounts and plain cash.
A new NerdWallet analysis puts the potential cost of avoiding the stock market at over $3.
3 million in lost retirement savings by the time today’s 25-year-old millennial retires at 65, assuming future economic and market conditions don’t veer sharply from historical averages.
NerdWallet looked at the last 40 years of market returns and interest rates to determine how much a 25-year-old who today earns a median annual income for that age ($40,456) and saves 15% would accumulate over the next 40 years, if conditions were similar to those of the past four decades.
We examined our hypothetical investor’s retirement savings across three scenarios:
- Fully invested in stocks
- Deposited in a standard savings account
- Holding all funds in cash, either literally or in a non-interest-bearing account.
To capture the wide range of possible outcomes, we ran thousands of simulations historical returns and volatility. For simplicity, this analysis focuses on a portfolio 100% invested in the market, but that allocation may be too aggressive for some millennial investors.
For details on our calculations, see the methodology.
- The path to millions is paved with stock market returns: Despite several periods of market volatility over the 40-year period analyzed, the analysis shows the stock market scenario coming out well ahead of the other two scenarios, accumulating $4.
57 million by the end of the period, before adjusting for inflation and after accounting for annual investment fees of 0.70%.
- A savings account can’t keep pace: In the scenario in which the saver deposits all retirement savings in a savings account, the outcome is a healthy but much lower $1.
27 million by the end of the period, before adjusting for inflation. That puts the potential cost of keeping money in a savings account rather than investing in the stock market at over $3.3 million during a 40-year time horizon.
The opportunity cost of leaving a sum that large on the table could be a bigger risk to millennials than stock market volatility. Sixty-three percent of 18- to 34-year-olds surveyed are saving for retirement in a savings account, according to NerdWallet’s 2016 financial health survey.
- The cash-under-the-mattress approach fares the worst: Here the savings contribution of $563,436 over a 40-year period gains no value at all — and results in a shortfall of over $4 million compared with the stock scenario.
NerdWallet’s analysts used 40 years of inflation data, Standard & Poor’s 500 returns, and three-month Treasury rates — a proxy for historical savings account rates, which were unavailable for the full time period analyzed — to determine the potential accumulation in each scenario, which was calculated the value of the portfolio before adjusting for inflation.
» Curious about inflation and purchasing power? Use our inflation calculator to find out how the value of a dollar has changed.
Historical returns don’t promise future returns
It’s unwise to assume that past market returns will dictate future returns. In fact, some analysts have advised investors to expect lower market returns going forward. But the comparison still makes a strong case for the value of investing in stocks — in this case, through an S&P 500 mutual fund — over a long time horizon when compared with savings accounts and cash.
To get a clearer indication of how investors could fare over a 40-year time frame, NerdWallet performed a Monte Carlo analysis, running the historical S&P 500 and Treasury data through 10,000 possible scenarios.
This process uncovers the probability of a range of possible outcomes by considering not just historical returns, but also the volatility of those returns — how far and how frequently the return strayed from the historical average.
While there is no way to predict future market behavior, the simulation found that for the 40-year period analyzed, stock market investors had over a 99% chance of maintaining at least their initial investment — as they would in cash or a savings account — and a 95% chance of accumulating at least $1.67 million, or nearly three times their initial investment. Those who instead chose a savings account had less than a 3% chance of tripling their initial investment. These figures were not adjusted for inflation.
“In the short run, the ups and downs of the stock market can make investing seem quite risky.
But our simulations use historical volatility to show that over the long term, stock market fluctuations can balance out and generate largely positive outcomes a majority of the time,” says Kyle Ramsay, a chartered financial analyst and head of wealth at NerdWallet. “The long-term story is something millennials ignore at their own risk.”
Millennials can embrace their long time horizons
Despite those odds, survey after survey has shown that millennials shy away from the stock market.
In addition to the 2016 NerdWallet survey that found 63% of millennials store their retirement savings in a savings account, a 2015 BlackRock report indicates that 46% of millennials believe investing is too risky, holding the highest cash allocation of any age group at 70%. And a Legg Mason survey from this year reported that 85% of millennials define themselves as either “somewhat or very conservative” when investing.
The long-term story (of investing) is something millennials ignore at their own risk.
Kyle Ramsay, CFA, Head of wealth at NerdWallet
These results aren’t surprising: Millennials came of age during the 2007-08 financial crisis, either investing for the first time during it or watching parents suffer the fallout. But context is key: Our 40-year analysis includes the Great Recession — the market ended 2008 down 37% — as well as the dot-com bubble burst and several other years of significant losses.
Still, the S&P 500 had an average annual return of 10.96% during the 40-year period analyzed, before inflation. By contrast, three-month Treasurys had an average nominal return of 4.61%.
“The biggest force millennials have on their sides is time,” Ramsay says. “Investing over 30 or more years should help young professionals weather the short-term storms in pursuit of long-term goals retirement.”
In fact, even if someone invested only over the 10-year period ending in 2016 — which includes the Great Recession — the numbers still come out in favor of the stock market by a wide margin: The average annual nominal return of the market was 6.88%, while Treasurys averaged 0.65%.
And in a worst-case scenario, such as a recession that occurs at or near an investor’s planned retirement age? It’s painful to consider the prospect of delaying retirement or retiring with a down investment portfolio, but the analysis found recovery is typically swift: Since 1976, S&P 500 returns including dividends have recovered 90% of their value within three years of a downturn four times five — including post-2008. Only in the 2000 downturn did the S&P 500 take longer to recover, taking five years to recover 89% of its value.
Keeping retirement savings the market wastes hard-earned dollars
There are good reasons to keep money in a savings account, such as maintaining an emergency fund, which generally should be kept liquid so it can be tapped when needed.
But as the analysis shows, when it comes to far-off goals retirement, not investing comes with an opportunity cost — in this case, $3.3 million to $4 million — that will dramatically shrink the saver’s eventual nest egg.
Investing also helps cover a range of financial blemishes. The analysis is a steady contribution of 15% of income, with annual salary adjustments for inflation. Most long-term investors will find their savings rate fluctuates with various lifestyle changes and milestones, and rarely is income on a constant upward trajectory.
If there are years when you don’t save money, the money you’ve already invested continues to work for you during that time. Funds kept in cash or savings vehicles that can’t match inflation will inevitably lose purchasing power during those periods.
Diversification and appropriate asset allocation significantly reduce risk
It’s worth highlighting that the returns surfaced in NerdWallet’s simulations are not dependent on risky trading behavior, but instead on regular contributions into the kind of broad-based equity mutual funds offered in a 401(k) or individual retirement account.
Mutual funds, specifically low-cost index funds and exchange-traded funds, allow investors to instantly spread their money around a wide range of investments. An S&P 500 index fund, which could have posted average annual returns similar to the findings in our analysis, allows an investor to hold a piece of up to 500 large U.S. companies with a single transaction.
Today, one can easily and cost-effectively achieve diversification via index funds.
Kyle Ramsay, CFA, Head of wealth at NerdWallet
“While consumers have more investment options today, they should still watch out for high fees that could ruin their future returns,” Ramsay warns. “Today, one can easily and cost-effectively achieve diversification via index funds. And if you don’t feel confident managing your investments yourself, there are numerous low-cost robo-advisors who can do it for you.”
Investors should also carefully select an asset allocation that meets their goals and their risk tolerance. An aggressive millennial investor may start out with a 100% equity allocation, as shown in this analysis, then slowly dial that down as retirement approaches.
But even young investors may feel more comfortable allocating a percentage of their portfolio to bonds, and an investor who is closer to retirement age may want to hold just 50% to 70% of his or her portfolio in stocks.
Investors can use an asset allocation calculator to determine the best investment mix for their needs.
Busting some common investing myths
- MYTH: You need a lot of money to invest. ETFs trade for a share price that can be well under $100, funds in a 401(k) account have no minimum investment requirement, and many online brokers let you open an account with no initial deposit. For more tips on how to invest small amounts, see NerdWallet’s guide to how to invest money.
- MYTH: You need an employer-sponsored retirement plan to save for retirement. A 401(k) or other employer plan gives you a leg up, especially if it matches a percentage of your contributions, but retirement savers without access to a company plan can still invest for retirement through an individual retirement account.
Check out our IRA guide to see if an IRA is right for you.
- MYTH: There’s no help for casual or small-dollar investors. Investors with small balances can now take advantage of robo-advisors, services that manage your investments with computer algorithms.
With that reduced overhead, management fees and account balance requirements are significantly reduced or, in some cases, eliminated. Learn more about robo-advisors and compare their fees and features in NerdWallet’s comprehensive robo-advisor breakdown.
Arielle O’Shea is a staff writer at NerdWallet, a personal finance website.
Email: [email protected] : @arioshea. Stephane Lesaffre and Diamond Richardson contributed data analysis to this report.
Annual savings were calculated as 15% of income for a 25-year-old with a starting salary of $40,456, the median for 25- to 34-year olds according to Bureau of Labor Statistics weekly earnings data.
The salary was increased annually by 3.7% for inflation, average consumer price index data for the time period studied.
A consistent 15% savings rate was used to meet a common rule of thumb from financial advisors.
Nominal returns were calculated using the 40-year period from the close of 1976 to the close of 2016. Investment returns are nominal Standard & Poor’s 500 returns over that time, with dividends reinvested. Nominal three-year Treasury bill returns were used as a proxy for savings account interest rates, which were unavailable for the full time period analyzed.
We calculated accumulation in two ways:
- We took the geometric mean of each year’s S&P 500 return and annualized three-month Treasury returns over the 40-year period, and then applied those to a 25-year-old beginning to invest today.
- We ran a Monte Carlo analysis to simulate potential median returns over the 40-year horizon, the historical mean return and standard deviation of the S&P 500 and three-month Treasurys.
The average annual S&P 500 return as calculated by the geometric mean was 10.96%, and the average annual three-month Treasury return was 4.61%, which we rounded to 4.6%.
Compounding the hypothetical investor’s annual contributions over 40 years using these historical mean returns results in the investor having $4.57 million when invested in stocks, versus $1.27 million when investing in a savings account or three-month Treasurys.
The Monte Carlo simulation returned a 50% chance of ending up with at least $4.95 million in the stock market. We chose to use the smaller number as the primary result.
The stock market investment return was reduced by fees, calculated as 0.70% annually, the rounded average of 15 years of 401(k) mutual fund expense ratios, as reported by the Investment Company Institute.