2021 in review - where should you have invested?

For my final podcast for 2021, I thought it would be interesting to look back to see how various investment asset-classes performed. This is important for two reasons. Firstly, it is wise to benchmark your investment returns so that you can assess relative performance. Secondly, it serves as a salient reminder about the cost of delay and procrastination.Short-term returns are unimportantIn isolation, short term returns are meaningless. That’s because your focus as an investor must be on maximising medium to long term investment returns. What can I invest in today that is likely to generate the highest returns over the next 5 to 10 years? That is the question you must ask yourself.Therefore, it’s important to highlight at the beginning of this blog that you should not put too much importance on short-term (i.e. 1 year) investment returns. Resist the temptation to guess what asset class will perform best next year. Instead, ask yourself which asset class or investment will produce the highest returns over the next 5+ years i.e. between 2022 and 2027.Share marketsIt was a year of two halves in share markets this year. The first half benefited from strong price appreciation, particularly for value stocks. The second half was adversely impacted by a few things including the risk that higher inflation may not be transitory, interest rate hikes occurring sooner than expected, central banks tapering QE and more recently, the potential impact of the new Omnicom variant.The table below sets out returns until the end of November 2021 for the main geographical markets.https://www.prosolution.com.au/wp-content/uploads/2021/12/Equity-market-returns-table.pngEmerging markets predominantly include China, Taiwan, South Korea and India. They have been impacted by all the concerns listed above plus many Chinese-specific matters including diplomatic and trade-related tensions, Evergrande default (that occurred last week), tech industry crackdown and economic growth concerns.This has conspired to make emerging markets the most attractively priced sub-asset class, behind the UK market, as illustrated in the table below.Expected returns are calculated by Research Affiliates, LLC using various evidence-based valuation models. Total return is the aggregate of income + earnings growth + change in valuation multiples.https://www.prosolution.com.au/wp-content/uploads/2021/12/Expected-share-market-returns.pngBond marketsAustralian bond investment returns this year are the worst since 1994. The Bloomberg AusBond Composite 0+ Yr Index lost 3.23% in the 12 months to the end of November 2021. Australian corporate bonds have performed slightly better losing circa 2% over the same period.Global bonds have also produced negative returns over the past 12 months – the Bloomberg Global Treasury Scaled Index (hedged) lost circa 1.5%.Bond values have been adversely impacted because the market has factored in the risk that interest rates may rise sooner than originally anticipated due to inflationary pressures. This is a lot more likely in the US than it is in Australia. Comparatively, it appears that the Australian bond market has overreacted to this risk.I should highlight that bonds play an important role in a portfolio’s asset allocation because they are negatively correlated with shares. That means when shares rise in value, bonds tend to fall and vice versa. Given share markeMy new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at [email protected]. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.