After a Long Year, There’s More Clarity Ahead For Investors

After a Long Year, There’s More Clarity Ahead For Investors

| Paul Fain, CFP®

After a long year, these spring days seem particularly sweet. Unlike 2020, when uncertainty was so widespread, we now see more clearly looking ahead.

The recent government checks to consumers, plus the big infrastructure project on the drawing board, could boost the U.S. economy. The world economy is healing as well.

Stocks of energy companies, banks, automakers, and leisure travel businesses are rising on expectations that improving economic conditions will unleash pent-up demand. These developments are positive for value-oriented funds, which have historically outperformed growth funds during periods of rapid economic growth. Small-cap stocks have also historically performed well coming out of recessions, and forecasts call for their continued outperformance of large caps this year.

In the bond markets, the rates on longer-term securities have jumped from historically low rates to simply low rates. It is important to remember the role bonds play in a diversified investment portfolio — to be a shock absorber at times when stock prices head downward.

Expect digital acceleration to continue around the world. Rapid change is not unprecedented: In World War II, 75% of U.S. artillery was horse-drawn. Less than four years later, we were in the atomic age.

Today, telemedicine already represents 10% of all doctor visits. Retailer Williams Sonoma’s online sales now outperform in-stores sales. Streaming video games are increasingly a spectator sport. E-sports stars earn millions of dollars in endorsements and fan subscriptions to watch them play video games online (yes, you read that right).

Consider the outlook of a recent American Funds webinar on “The World in 2030”: We will continue to embrace remote employment, virtual education, and telemedicine. Also, expect increases in remote health monitoring and breakthroughs in curing major diseases. In addition to driverless cars, we will see car-to-car communications; and car-to-insurance company communications that will impact our insurance rates.

As my wife frequently quotes, “life isn’t always rainbows and unicorns.” Investment markets are, at best, unpredictable. Seen and unforeseen challenges always exist, so investors need to understand their financial and emotional risk tolerance, the latter being their “freak-out point,” i.e., when markets retreat.

“To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. … What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework,” writes Warren Buffett.