As we close out 2021 and look to 2022, I think it wise to consider a few "investor don’ts” for the new year, advices Chuck Carlson, dividend reinvestment expert and editor of DRIP Investor.
Don’t manage your investment portfolio through the prism of politics.
I’ve been following the stock market for nearly 40 years. In that time, I’ve heard from many investors who buy/sell investments based on who is sitting in the Oval Office or what party is controlling congress. And I can’t think of a time when these investors did well because they made investment decisions based on politics.
I have seen strong stock markets when Republicans and Democrats have been president and controlled Congress, and I have seen lousy markets when Republicans and Democrats have been president and controlled Congress. My point is that your political bent won’t make you a better investor or help you make better investment decisions.
I know the current political climate is super-charged with very strong opinions on both sides of aisle; and everything seems to be politicized these days. Don’t let your investment program become politicized. At the end of the day, stock markets move in a sustained way based on three major engines — interest rates, inflation, and corporate profits.
And while you may think that the politics of the day will have a big impact on those three engines — and make investment decisions based on those prognostications — you are likely to be wrong. Given 2022 is an election year, you will be inundated with doomsday scenarios if this person gets elected or this policy gets approved by congress.
Resist the urge to act on the information overload. Stay focused on the things that really matter to your investment portfolio (inflation, interest rates, and perhaps most important of all, corporate profits) and maintain a long-term view.
Don’t manage your portfolio based on what you think might happen with taxes.
How to pay for trillions of dollars of stimulus and “infrastructure” spending has led to a lot of tax ideas being tossed around in Congress. Raising capital-gains tax rate . . . increasing corporate tax rates . . . . taxing unrealized gains . . . a lot of stuff has been thrown against the wall.
What will stick is still to be determined. But investors who think they can anticipate what will happen to taxes — not just in 2022 but for the next several years — are kidding themselves.
Even if the current tax structure gets overhauled, what prevents the next regime in Washington from making changes . . . and the regime after that . . . and the regime after that. The point is that tax policy has become so fluid that to make investment decisions based on taxes can be extremely counter-productive to your investments.
Should investors consider taxes when making a sell decision? Certainly. But taxes should never be the primary reason for changing an investment portfolio. Ultimately, the investment merit of the security is truly what matters and should be the focus of the buy/sell decision.
Don’t manage your investment portfolio looking out the rearview mirror.
You have no doubt read many stories and heard pontifications by market experts saying that future market returns can’t possibly be good because the last decade has been so strong. In their world, the past determines the future.
While I do believe in the concept of reversion to the mean, I also believe in the future being dictated in large part by, well, the future. Yes, the last 10 years have been great for stocks. But if you look at the preceding 10 years, stocks weren’t so great. Indeed, the average annual return of large-cap stocks from 2000 through 2009 was a negative 0.95%.
Was the last decade simply making up for the lousy decade before it? Will market returns going forward return to more “normal” numbers (around 10% per year)? Could we have a repeat of 2021 in 2022? Could 2022 be a truly crummy year for stocks?
The answer to all of those questions is a firm “maybe.” The point — 2022 could be a great year for stocks. Or it could be a lousy year. Or it could be a year in line with long-term market averages. But what happens in 2022 is not a result of what happened in 2021 or 2020 or 2019.
Don’t be reluctant to buy stocks on price declines, regardless of how “scary” it may feel.
My guess is that stock market volatility will be elevated in 2022 as investors sort out a host of issues — elections, “transitory” versus permanent inflation, perhaps a new wave of Covid, etc.
While such crosscurrents can be unnerving, they also can provide opportunities for investors who are willing to put some money to work during declines. Be ready for such declines in 2022 and make sure you have that “watch list” of stocks handy.
