Market Outlook: Growth Sectors, Inflation, Retirement Should Help Shape Your 2022 Investing Strategy
With 2022 fast approaching, we sat down with Axos Invest Senior Vice President Tracy Gallman for a Market Outlook, assessing the state of investing in 2021, as well as what new and experienced investors alike can expect from the coming year.
Q: After the COVID-19 rollercoaster of 2020, 2021 has reversed course and turned into a big year for investing. The Dow, S&P 500, and NASDAQ were all up about 20 percent through the first 9 months of the year, the home market was booming, and overall, optimism was high. Why was 2021 the year so many got financially engaged with the market?
Gallman: 2021 was the year of engagement because individual investors finally had time to explore that area of their lives. COVID allowed everyone to slow down and really consider their financial life. That time gave people the chance to consider four key financial behaviors: earning, spending, investing, and insuring. Once they worked that out, that’s when they ultimately took action for themselves and their families. Part of that was also driven by the ready availability of financial services. Investors were able to easily locate help, get their critical questions answered, then make immediate decisions.
Q: Do you think that investors getting into the market now have different priorities than most investors from years past?
Gallman: No, I don’t think the investing priorities are different. People still want to retire, kids want to go to college, so creating those income streams is still important. What has happened is that investing has now become a top priority in a person’s life. Where this might have been a fourth or fifth priority on the list before, it’s now shot up to number 1 or 2 for many. With this new prioritization, investors are in a better position to achieve their financial goals … because we know time in the market is one of the key methods for achieving wealth over time.
Q: Part of this surge in first-time investors seems to be a feeling that the system puts the little guy at a big disadvantage. Over 40 percent of Americans think professional financial advisors are only for the wealthy – and about three-quarters are handling family finances all by themselves. Do you see this DIY trend continuing?
Gallman: Yes, DIY finances will continue. For many, this is a way to keep involved in their finances, follow values or key areas they’re interested in, or manage securities that were gifted or inherited or earned like stock options.
However, it’s possible that we will see those investors take more of a dual approach over time, pairing their self-directed trading account with an advice-led managed account. Managed accounts are specifically crafted to help someone perfectly balance their investment objectives with their personal risk tolerance.
The managed account has a built-in investment philosophy and established buy and sell processes that offer peace of mind. Yet, it can adapt to changing market conditions and even focus on delivering one key outcome or goal. Combining that type of managed account with a self-directed trading account creates a wealth management strategy that really helps investors play out their own ideas but with the comfort of knowing that they’ve still got an investment advisor continuously focused on delivering the outcomes they need.
"It’s possible that we will see those investors take more of a dual approach over time, pairing their self-directed trading account with an advice-led managed account."
Q: As we move into 2022, what do you see as the most important investing trends that savvy investors need to keep an eye on?
Gallman: It’ll still be important to monitor the continued COVID response. The restriction impacts, the economic costs of those restrictions, how the government provides relief programs – they’ll all be key to how markets respond throughout the year.
Second, monetary policy will continue to be a focus, including consideration to the influences of an accommodative monetary policy.
Third, there’s also environmental social governance, climate change policies, and what happens with renewable energy. Those are areas that will have an enormous influence on social, economic, and monetary policy.
Finally, there’s always innovation. Technology, healthcare, and consumer goods industries will always be catalysts in driving the economy.
Q. Any particular sectors you recommend investors watch closely in 2022?
Gallman: It’s important for investors to really consider their risk tolerance and diversification needs when they’re reviewing sector allocations. To help with that, diversification through mutual funds or exchange-traded funds can be very effective ways to get professionally managed or index-like sector allocation with some solid risk controls.
For those who prefer stocks, carefully consider stock ideas in the areas you know and understand. Don’t discount your own experience in backing ideas you think could potentially benefit from the current regulatory, economic, and monetary policy environment in that field.
It’ll also be important for investors to keep an eye open for potential cyclical and secular shifts in the market. The market has been in a secular bull market since 2009. One of the signs that a possible change may be coming happens when we start seeing excess returns in the market.
For example, the long-term average of the S&P 500 index after dividends and inflation is just 2.4%. This is called the S&P Real Return. Analysis shows that when the S&P Real Return reaches 10%, this can mean a secular bull market is ending. It takes time, so the market won’t automatically shift to a secular bear market, but there can be some notable ups and downs as the shift occurs. Investors need to be ready to react to these types of changing market conditions when they happen.
Q: Inflation is currently at a 13 year high, and fears are rising among some that that trend may continue. What do current market indicators lead you to believe about the state of inflation next year? And how concerned should the average investor be?
Gallman: Inflation is a key consideration in any investment strategy. Of course, there are also many asset classes where investors can turn that have proven their ability to weather the inflation storm. Small caps, natural resources, commodities, some sources of real estate, and TIPs are all hedges against rising prices.
By accessing these types of sectors through mutual funds or ETFs (exchange-traded funds), investors can achieve broad diversification while still getting the targeted exposure they want for their portfolio.
Q: If inflation continues to rise, is that a time to pull back your money in the market?
Gallman: Despite inflationary increases, it’s still going to be better to be a participant in the equity markets versus not being in at all. This is the only way to counter the costs that come with a rise in inflation. However, investors still have to consider their investment objectives, their risk tolerances, and their own personal time horizon.
Definitely give some thought to an asset allocation approach that covers size (small, medium, and large) plus style (growth and value), and use strategies that give you the ability to go to cash or flex your asset allocation when market conditions change.
Q: Retirement has always been a major investing goal, but more and more people say they're concerned about where they currently stand on the road to retirement. In fact, studies show more people are asking for help from their financial institutions when it comes to retirement planning, and over 60 percent said they wish there was more automation involved in crafting a retirement plan.
What can new investors do to help keep their retirement goals clearly in focus during their investing journeys?
Gallman: Retirement requires a different approach. When creating a portfolio for retirement, it’s important to move away from traditional asset allocation and look hard at investing from a different perspective.
We encourage investors to design their portfolios around the amount they believe they’ll need to spend in retirement. That strategy would potentially include a higher allocation to stocks, balanced by a built-in risk mitigation position. That risk mitigation is designed to take your portfolio out of the market when there’s volatility, all with the goal of minimizing loss as much as possible.
Finally, the strategy should have a reserve of cash, with perhaps up to three years’ worth of desired spending levels. Creating a portfolio using these three key techniques can help hit that retirement distribution or income goal.
Investors could also look at different types of dividend equity portfolios or equity/fixed income-oriented portfolios that deliver a consistent dividend growth year over year.
Saving early, leveraging both Traditional and Roth IRAs, having a 401k plan, and creating a sound strategy for diversification and risk management are your keys in developing any solid retirement strategy.
But of course, any investor should be sure to consult with their own tax, legal, accounting, and investment advisors before engaging in any transaction.
"When creating a portfolio for retirement, it’s important to move away from traditional asset allocation and look hard at investing from a different perspective."
Q: With so many new investors getting into the market, what are five tips you would offer those new traders to help them get the most out of their online trading accounts in 2022?
Gallman: First things first. Always consider if you’ve got the time, the desire, and the knowledge to manage all or some of your portfolio.
If you answered yes to one or more of these three items, then find the investment platform that offers you the simplest access to the research and ideas you need to be successful.
Come ready to research ideas that interested you; that align with your values and fit within your range of risk. We all know stocks can be very volatile, but mutual funds and ETFS can provide diversified approaches to the targeted exposures you want in your portfolio.
Determine early to follow key fundamentals. You’ll be the one deciding what those fundamentals are, but some principles to consider: Buy low, sell high. Be diversified and avoid concentrating in any one stock or area of the market. Stay invested with as much as your risk appetite allows. Or don’t be afraid to sell a stock. Keep your winners and sell your losers!
And if you ever decide you don’t have time, don’t have the desire, or can’t chase the knowledge, don’t worry. Managed accounts are there specifically to help support you with your financial goals. It never has to be all or nothing. Blended approaches using different types of accounts can be beneficial to your overall investment plan.
Views expressed are as of October 28, 2021, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author, as applicable, and not necessarily those of Axos Invest. Consult with your own tax, legal, accounting, and investment advisors before engaging in any transaction.
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