2021: A Year in Review

Mark Meredith, CFP®

2021 is now a distant memory. The annual review blog posts seem to come a little too frequently. Having children has turbocharged the rate at which time passes. Back when we first became aware of COVID-19, I suspected life would slow down a great deal. The opposite has seemed to occur.

2021 Favorites

The Business

This March will be the three year anniversary of Meredith Wealth Planning. Clients are often curious about how the business is going, and I’m happy to report things have continued to go quite well. Three years ago I had 0 clients and $0 in assets under management. Today the firm serves over 140 clients households and north of $145 million in assets under management.

The flat fee advisory model seems to have been received as I thought it might. We will not be raising the annual advisory fee in 2022. With inflation running close to 7% in the last 12 months and the US stock market gaining 28.66% in 2021, I suspect my advice has become a bit cheaper in real terms. Some year the advisory fee will go up to catch up with cost of living increases, but you’ll be notified well in advance. I don’t think you should be penalized with higher advisory fees simply because you have more money than you had 12 months ago.

Unfortunately the first venture I took into a partnership with another advisor did not work out as planned, and once again I am a “solo” firm for the time being.

The Family

Some of you probably noticed from the Christmas card that Rebecca and I are expecting our third child in May of this year.

Our daughter, Cecilia, will be 3 in May and our son, Sawyer, will be 6 in June. Our Jack Russell Terrier, Oliver, hasn’t skipped a beat and will be 11 in October. Everyone in the household is excited to welcome a new member of the family.

Rebecca still wears 3 hats: Mother, Occupational Therapist, and Yoga guru. 2021 was 15 years since we first started dating (married in 2012). I still haven’t figured out why she tolerates me, but I’m sure happy that she does. As one client likes to say “her eyesight must not be very good”.

Equity Markets

Financial media personalities are really good at explaining the past with pinpoint accuracy, and failing miserably at predicting the future. Below is a post I recently put on Linkedin, showing how big bank market predictions once again missed the mark in 2021. This is nothing unusual.

In that spirit, let me tell you more about 2021 and give you little to no insight as to what lies ahead for 2022.

Stocks were lights out in 2021. The US stock market clocked a total return of 25.71% in 2021 (as measured by VTSAX), while the Total World Stock earned 18.27% (as measured by VT). The S&P 500 hit 70 new all-time highs in 2021. Consistent with many prior all-time highs, there were abundant claims that a crash was imminent or that buying at an all-time high is a bad idea.

What if I told you that investing in the S&P 500 index at all time highs has led to better returns than investing after a 20% decline? The data below from Dimensional Fund Advisors shows that has been the case historically. Investing at all-time highs in the S&P 500 index has led to subsequent 9.9% annualized returns over the next 5 years (Source: DFA Research).

Since the start of 2013, we have now seen 346 (THREE HUNDRED AND FORTY SIX) new all time highs in the S&P 500 index. Just imagine, there are people that thought the first all-time high hit in 2013 was the top. Here, I have proof:

Go ahead and read the full article here, it is quite convincing.

No matter how many times it’s proven otherwise, some still hold out hope that a special someone can predict the future. At any given moment there are probably thousands of people predicting a market crash. When the market crashes again one day (which is a feature of markets, not a bug), someone will have luckily timed their dire forecast well and be heralded as the next great guru. Just remember, bears make money so infrequently in financial markets that when they do there are movies made about it (The Big Short).

Betting against stocks has been a bad move in the long run. Below we show $1 invested in US stocks in 1926 has grown to $11,070 by the end of November 2021. Of course none of us have a 95 year investment horizon and there are many excruciating periods of market turbulence, but this is why it is prudent to diversify accordingly.

Growth of wealth in US stocks

Interest Rates and The Federal Reserve

Interest rates popped a bit in the 1st quarter of 2021, then leveled off throughout the remainder of the year. A 10 year US Treasury Note started the year at 0.93% and ended at 1.52%. The 5 year Note went from 0.36% at the start of the year to 1.26% on 12/31.

At the close of business on 01/11/2022, we now see a 5 year rate at 1.51% and a 10 year at 1.75%.

With the reported inflation numbers near 7%, rates seem insanely low at the moment. The last time inflation was this high was 1982 and a 10 year Treasury note at that time was paying 13.8%.

There could be a couple things at play here as to why the bond market isn’t fully appreciating the inflation numbers. One, the market participants do indeed think that inflation is quite temporary and will soon return to a more normal range. Two, the Federal Reserve Bank is artificially suppressing interest rates through its open market operations and easy money policy.

The Fed’s balance sheet grew from $7.3 trillion at the start of 2021 to approximately $8.75 trillion at the end of the year. The total assets of the Federal Reserve have more than doubled since September of 2019 (Source: Federal Reserve Website).

Federal Reserve Balance Sheet

The Fed has signaled they will begin reducing their bond purchases this year, and probably raise interest rates 3 times. The odds of this happening should already be reflected in bond market prices, thus we cannot use it to our advantage.

Value Versus Growth: Time for a Regime Change?

Believe it or not, we did see a premium return for US value stocks in 2021. The value premium was quite robust in small caps. One of our preferred US small cap value funds (Avantis US Small Cap Value ETF, AVUV), clocked a return of 42.23% in 2021. This compares well against the Ishares Russell 1000 Growth (IWF) return of 27.43%. While it is a short window of time, Avantis US Small Cap Value ETF ranked in the top 8% of all US Small Cap Value funds in 2021.

Through 11 days of 2022 we have continued to see this premium, with Avantis up about 2.60% versus a negative 3.81% for the Russell 1000 Growth.

As measured by price to book ratio, growth stocks in the US continue to trade at nosebleed levels. Below is a chart from Dimensional Fund Advisors comparing the valuations between growth and value stocks.

Recently Cliff Asness of AQR published a blog post with no words, just a picture (below) depicting the current spread in valuations between growth and value stocks around the globe. We have now surpassed 1999 dotcom bubble spreads.

History does not have to repeat. The spread can continue to widen, but value as a style went on a tremendous run after the dotcom bubble collapsed.

It’s clear from these charts that value stocks looked like a relative bargain 2-3 years ago, and they have only gotten cheaper relative to growth. For this reason it is prudent to diversify amongst styles like value, momentum, and profitability because there is no such thing as a sure thing in financial markets. Momentum and value pair together like spaghetti and meatballs (if you’re a vegan then maybe we should say spaghetti and Beyond Meatballs).

Financial Planning for 2022 and Ahead

No major tax changes occurred in 2021 like we may have suspected. I think it’s often prudent to wait and see what legislation passes before making drastic financial planning decisions. Here are a few bullet points for 2022.

  • The Enhanced Child Tax Credit has expired and will return to the normal credit of $2,000, subject to phase outs.
  • No changes have been enacted for Backdoor Roth IRAs or Mega Backdoor Roth IRAs.
  • Medicare’s Part B premium has increased to about $170 per month.
  • Social Security’s cost of living adjustment was 5.9%.
  • For those under age 50, you can defer $20,500 for employee 401k contributions in 2022 and $27,000 if over 50.
  • A SEP IRA owner can defer a maximum of $61,000 for 2022.

There is still a large window of opportunity for Roth IRA conversions under current tax law through about 2025, then the Tax Cuts and Jobs Act rates will sunset. It’s not always a slam dunk, but it’s something that should be evaluated carefully.

Thanks for reading and cheers to another great year ahead!

Don't go through retirement alone.

Step 1) 30 Minute Consultation

A quick chat to get to know each other and learn more about what you're looking for in an advisor

Step 2) Think About It

We know that working with an advisor is a big decision, take some time & sleep on it

Step 3) Recommendations, Strategy, & Implementation

When you're ready, we get started with our planning process

Talk with a retirement partner today
A no-pressure, 30-minute conversation to see if we're the right fit for you
Schedule Your Free Consultation