2021 in review, for investors

Last updated 1/25/22.

I started this blog in December of 2020, and one of my first articles was actually a year in review article - 2020 in review.

For most of the world, 2020 couldn’t end soon enough. Unfortunately, 2021 wasn’t much better. Many of the issues that plagued us 2020 persisted. Despite widespread vaccinations, new variants of COVID continue to emerge. Politics felt just as divisive. The economy rebounded, but inflation spiked to the highest levels in decades. That, combined with supply chain issues, meant that many consumer goods were more expensive than ever. There was a mad scramble for real estate in parts of the country, and many people were priced out of purchasing homes due to intense competition and price spikes. Did anything good come out of 2021?

Asset performance

For investors, absolutely. 2021 turned out to be an excellent year for the stock market and most other assets. Here is a graph of the returns of some selected assets in 2021:

The S&P 500 index is up 26.89% for the year, and S&P 500 total returns (with dividends reinvested) is 28.71% for the year, representing one of the highest single year returns in history. These returns surpassed almost all expectations at the beginning of the year. The S&P 500 also broke the 4,000 point milestone in 2021, and might break 5,000 soon. And so the bull run of the U.S. stock market continues. While the stock market was not the best performing asset of the year (that distinction almost certainly goes to Shiba Inu, a meme crypto coin, with 43,000,000% returns), it remains the benchmark to which all other investments are compared to.

Most other assets also did well. U.S. residential real estate returns were good, but trailed stocks. The S&P Core-Logic Case-Shiller U.S. National Home Price index was up 18.84% for in 2021. Keep in mind this index only tracks average residential home prices. It does not account for any rental income, and therefore does not represent the overall returns of a rental real estate investor. Real estate returns are also very market-specific, and this index represents a national average. Every homeowner and real estate investor experiences individualized returns. There is no way to invest in the national average home price index.

When it comes to commercial real estate, the FTSE NAREIT All Equity Reits Index returned 41.00% for 2021 (as of December 30, 2021), handily beating stocks. Many REIT funds matched this performance. For example, Vanguard’s popular Vanguard Real Estate ETF (VNQ) returned a whopping 40.33% for the year, easily beating both the S&P 500 and residential real estate, and most other asset classes.

Global equities were also up for the year, but performance was more muted. For example, Morningstar’s Global Markets ex-US index (global stocks, excluding the US) returned 8.87% in 2021. MSCI also has a number of global stock indices; the MSCI equivalent index would be the MSCI ACWI ex-US All Cap index, which returned 9.08%. These indices cover approximately 99% of all global stocks across all market capitalizations and in both developed and emerging markets, excluding U.S. stocks.

2021 was a poor year for bonds and fixed-income assets. Not only did most bond funds fail to beat inflation, but many had negative returns for the year to boot. Note that many popular “total bond market” funds actually consist of only investment grade corporate bonds and government treasuries, and high-yield or junk bonds are typically excluded, so a “total bond” fund or index is a bit of a misnomer. The Bloomberg U.S. Aggregate Bond Index, or the “Agg”, returned -1.54% in 2021, and the Morningstar U.S. Core Bond index returned -1.61% in 2021. These numbers are pretty close to the returns that investors in a “total bond fund” received. For example, Vanguard’s popular Total Bond Market Index fund (VBTLX) returned -1.67% for the year. Treasury inflation-protected bonds (TIPs) did better, due to high inflation. Vanguard’s Inflation-Protected Securities fund (VIPSX) returned 5.56% for the year.

2021 was a banner year for cryptocurrencies, many of which achieved massive returns and widespread recognition and adoption. There are now over 15,000 different coins tracked by coinmarketcap.com, although there is no overall cryptocurrency index. Meme coins aside, Bitcoin, the oldest cryptocurrency and the largest by market cap, is often used as a benchmark for the overall cryptocurrency market. Note that cryptocurrencies trade 24/7 and each cryptocurrency exchange is actually its own marketplace, so there is no precise opening or closing price for any coin on any given day. Nonetheless, 1 Bitcoin was worth approximately $32,127 on January 1, 2021, and approximately $47,686 on December 31, 2021, representing 48.43% gains. In November 2021, Bitcoin briefly hit an all-time high of $69,000.

Finally, inflation was the highest on record in 40 years. In 2021, inflation for all consumer items, as measured by the CPI-U, stood at 7.00%. In contrast, inflation was only 1.23% in 2020, 1.81% in 2019, and the annualized inflation rate over the past 100+ years (1914 to 2020) is 3.08%. U.S. consumers have not seen inflation this high since 1981, when inflation was a whopping 10.33%. In the face of inflation, investing is more important than ever, because the purchasing power of your money will continue to shrink over time, unless you find ways to grow it. One of my Investing 101 articles covers this topic in much greater detail, along with a chart of historical U.S. inflation rates.

Musings and reflections

Here are some noteworthy (to me, anyway) musings about 2021 from a financial standpoint:

GameStop, retail investors, and meme stock frenzy. 2021 saw GameStop and several other “meme stocks”, such as AMC, take off in a reddit-fueled retail investing craze. I wrote a separate article about GameStop’s short squeeze earlier this year. Notably, GameStop had a second surge in price shortly after its short squeeze, and its stock price remains rather inexplicably high.

The explosion of cryptocurrency. Towards the end of 2020, many cryptocurrencies, including the two largest by market cap, Bitcoin and Ethereum, went on a massive bull run. This continued for the first half of 2021, with Bitcoin prices peaking in April, followed immediately by a 50% crash, followed by a quick rebound to a second all-time high in November, before crashing again to end the year. Many other coins, however, far exceeded Bitcoin in performance. For example, Ethereum, the second largest cryptocurrency by market cap, had much more impressive gains than Bitcoin, with 387.58%(!) gains in 2021. Solana, the fifth largest cryptocurrency by market cap, had 9,788% gains in 2021. In comparison, Bitcoin’s 48.43% gains look rather pedestrian! Of course, I already mentioned that Shiba Inu, a meme coin, had 43 million percent returns in 2021.

SPACs. SPAC stands for Special Purpose Acquisition Company, a special type of holding company that offers an alternative way to IPOs for private companies to go public. The SPAC itself is just a holding company that raises capital with the goal of searching for and acquiring a privately owned company seeking to go public. If this is successful, shareholders in the SPAC become shareholders of the newly public company. In late 2020 and early 2021, retail investors flooded SPACs in hopes of getting in on the ground floor of the next big blockbuster IPO. For example, a SPAC named Churchill Capital IV (CCIV) was available to the general public at $10 per share. When rumors broke in early 2021 that CCIV would merge with Lucid Motors, an electric car company, speculation and hype drove the SPAC’s price to almost $60 in just a few weeks. More recently, when news broke that a SPAC named Digital World Acquisition Corp (DWAC) was seeking to take Donald Trump’s new media company public, shares of DWAC spiked from $10 to $90 over the course of two days.

SPACs offered some of the highest volatility and highest returns of any asset in 2021 outside of cryptocurrency. However, there are many downsides to investing in SPACs, which I won’t belabor here.

Student loan deferment. Federal student loan payments were deferred for all of 2021. Additionally, while in deferment, student loans accrued 0% interest. While student loan deferment was supposed to end on January 31, 2022, it was extended again to May 1, 2022. Unfortunately, the unpredictability of government policy can make financial planning around loan deferment challenging. For those with student loans, the correct thing to do would have been to invest money that otherwise would have gone to loan repayment into the market for handsome gains in 2021. Of course, hindsight is 20/20, as this would have backfired spectacularly if the market crashed in 2021 instead.

Increased pre-tax retirement contributions. Finally, the IRS increased the annual contribution limit for 401(k), 403(b) and 457 plans to $20,500 in 2022, up from $19,500 in 2021. Be sure to make adjustments now to max out your pre-tax retirement contributions in 2022!

Personal finances

Carrying over from my 2020 in review, once again, here is a Sankey diagram of A Frugal Doctor’s personal finances for 2021. All values are normalized to 100% of gross income.

In the spirit of being frugal, we were able to keep expenses relatively low in 2021. Our annual expenses represented only 15.2% of our gross income, or 23.3% of our take-home income. Therefore, we were able to achieve a rather high personal savings rate (PSR). Additionally, because the markets performed so well in 2021, investment returns contributed significantly to nest egg growth. The result was that the size of our nest egg grew by more than our income in 2021, thanks to both strong savings and strong returns from existing investments.

Asset allocation

There have been minor changes to asset allocation, although not on purpose. The most notable is that with the continued high stock market returns and negative bond returns, my asset allocation has naturally skewed even more towards stocks despite no changes in my contributions. In 2020, bonds were about 19% of my portfolio, but they have now shrunken to just 12.8%.

This goes against prevailing wisdom of increasing the percentage of bonds in your overall portfolio as you age. I am now faced with a dilemma: I can either actively rebalance soon (by selling some stocks and buying bonds), or I can passively rebalance over time (by increasing how much I am contributing to bonds), or I can simply leave things be. Being stock-heavy is certainly a boon in a bull market, and bonds feel pretty bad to invest in right now. But who knows how long this bull market will last?

The only other notable change is I now have a negligible amount in cryptocurrency, although this will likely increase with time. This came about when I first dabbled with mining Ethereum on my home computer, which ultimately led me to further investigate blockchain technology and the world of DeFi. The merits of cryptocurrency as an investment are still debatable, but there’s no question that they’ve been the best performing asset class over the past few years. For people who are young or are willing to tolerate the risk and volatility, having some cryptocurrency in their portfolio may be worthwhile. It’s not often that financial markets are introduced to a truly novel asset class, as traditional assets such as stocks, bonds, real estate, commodities, etc., have all been around for centuries. To some degree, cryptocurrency valuations seem to be based on the “greater fool” theory, but I also think cryptocurrencies and blockchain technology are here to stay. But with wealthy investors, major institutions, and even some governments quickly entering the crypto space, it will likely turn into a more “mature” asset in time, and the potential for future explosive growth may be limited.

Investment holdings

Very little has changed in terms of the funds I actually hold. It is still the same total stock market index funds, S&P 500 index funds, international index funds and bond funds I had in 2020. Again, you’ll see that I own multiple funds that serve essentially the same purpose (i.e., VTSAX, FSKAX, FZROX). There’s no real reason for this except that I have accounts at different brokerages (Vanguard was the first brokerage account I ever opened, and Fidelity manages my employer’s 401(k) plan). And although I prefer total stock market funds, I still own some S&P 500 funds from when I first started investing. Also, I should note that a total stock market fund is not offered in my 401(k) plan, so I “approximated” one using FXAIX and FSMAX.

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX). 2021 returns: +25.71%. Still the largest and possibly greatest index fund ever created. May John Bogle rest in peace, because his creations have allowed countless ordinary Americans to become millionaires without tricks or gimmicks. I should note that in 2021, the total stock market underperformed the S&P 500, whereas in 2020 the situation was reversed.

Vanguard 500 Index Fund Admiral Shares (VFIAX). 2021 returns: +28.66%. The oldest and most popular S&P 500 index fund in the world. Really the OG of index investing. Still a great fund, but total stock market funds have become more popular recently in the spirit of true passive investing. Mostly a legacy investment from when I first started investing.

Vanguard Total Bond Market index Fund Institutional (VBTIX). 2021 returns: -1.65%. A bond index fund. As discussed above, bond funds took a beating this year and had negative returns, both nominal (not adjusted for inflation) and real (adjusted for inflation).

Fidelity Total Market Index Fund (FSKAX). 2021 returns: +25.65%. Fidelity’s version of VTSAX with no minimum investment and even lower expense ratio (.015 vs .04). However, seems to have trailed its Vanguard counterpart by 6 basis points this year.

Fidelity ZERO Total Market Index Fund (FZROX). 2021 returns: +26.01%. Keep in mind that while VTSAX, FSKAX and FZROX are all total stock market index funds, they do not track the same benchmark. Performance will be similar, but not identical. In 2020, FZROX disappointingly lagged VTSAX by 49 basis points. But in 2021, FZROX outperformed by 30 basis points.

Fidelity U.S. Bond Index Fund (FXNAX). 2021 returns: -1.79%. Fidelity’s U.S. bond fund. See above. Slightly worse than VBTIX this year.

Fidelity Total International Index Fund (FTIHX). 2021 returns: +8.47%. Part of my foreign diversification. This is approximately all global equities, excluding the U.S.

Fidelity Emerging Markets Index Fund (FPADX). 2021 returns: -3.04%. Also part of my foreign diversification. However, emerging markets are more volatile with greater potential for both returns and risk compared to mature international markets. In 2020, emerging markets outperformed developed markets, but the situation reversed in 2021.

Fidelity ZERO international Index Fund (FZILX). 2021 returns: +8.21%. One of Fidelity’s ZERO funds; unfortunately lagged FTIHX in performance this year.

Fidelity 500 Index Fund (FXAIX). 2021 returns: +28.69%. Fidelity’s S&P 500 index fund. Again, no minimum investment and lower expense ratio. I hold this because my employer’s 401(k) offering through Fidelity does not have FSKAX available. Outperformed Vanguard’s version slightly this year, and came extremely close to the actual S&P 500 index total returns (28.71%).

Fidelity Extended Market Index fund (FSMAX). 2021 returns: +12.41%. A small- to mid-cap U.S. stock market fund. I hold this because together with FXAIX, I can approximate a total stock market index fund in my 401(k) account. In 2020, the rest of the U.S. market greatly outperformed the S&P 500, and at least some of it was attributable to the meteoric rise of Tesla (TSLA), which was not part of the S&P 500 at that time. However, TSLA became part of the S&P 500 in December 2020.

Miscellaneous holdings: I have a few shares of individual stocks, including Advanced Micro Devices (AMD), Corsair Gaming (CRSR), STAG Industrials (STAG), Realty Income Corp (O), and Tesla (TSLA). Combined, these represent only about 1% of my portfolio. At various points in 2021, while actively trading, I also owned shares of GameStop (GME), Blackberry (BB), AMC Entertainment (AMC), SPDR S&P 500 ETF (SPY), United Wholesale Mortgage (UWMC), and ARK Innovations (ARKK).

Conclusion

Overall, 2021 was a very strong year for the financial markets. One year ago, at the conclusion of my 2020 in review, I wrote the following:

Remember that historically, the S&P 500 only returns around 9 to 10% CAGR. The bull market that started in 2009 continues onward. With a surge in COVID during the holidays, contentious stimulus talks, a new administration, and concerns for overvaluation in the market, will there be another market correction in 2021? Or will widespread vaccination and unprecedented quantitative easing lead to another year of all-time highs? Who knows. As for me, I plan to keep doing what I’ve always done: be frugal, minimize expenses, continue automatic investments, trust the process, and stay the course.

Not much has changed, except that it’s not an election year, and the Federal Reserve plans to start tapering its quantitative easing in 2022. But we do have a surging new COVID variant in Omicron, and market is at new all-time highs, so concerns of market overvaluation persist. What’s in store for 2022? Who knows! My plan, however, remains the same. Thanks for reading, stay safe, and have a happy New Year!

1/25/22 update: now updated with full inflation data for 2021. Note that the asset returns in this article are as of December 31, 2021. As of late January 2022, the markets have indeed entered correction territory, with most major indexes down 10% or more.