How to Invest in 2021

What can we learn from past periods with new presidents and recessions?

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While 2020 ended up being a good year for investors, with the S&P 500 gaining about 16% for the year, it was anything but a smooth ride. From record-high levels in early February, the S&P 500 dropped over 30% by late March due in large part to the economic fallout from COVID-19. 

But from those March lows, the market rallied through the end of the year. These gains were uneven at best. E-commerce giant Amazon was up 76% by close on Dec. 31, while Apple, another stock that benefited from stay-at-home restrictions, gained over 80% by year’s end. On the other hand, some stocks in industries hit hard by the pandemic suffered major losses in 2020. Carnival Cruise Line is a good example: Its shares lost over 57% for the year. 

So what does 2021 have in store for investors? Here are some issues to consider when formulating your investment strategy for the year. 

Key Takeaways

  • It is likely that 2021 will be another challenging year for investors as recovery from COVID-19 continues.
  • Market forecasts vary among financial experts and many are contingent on how the economy will rebound from the pandemic.
  • Investors are wise to focus on their long-term investment strategy rather than on what the markets might do in any given year.
  • Investors looking for opportunities may find them in disruptor stocks, non-U.S. equities, and sectors that meet consumers’ needs, experts said.
  • Before investing money this year, investors should build up their emergency fund.

Investing During a Pandemic 

There is no playbook for investing during pandemics because, historically, they have been once-in-a-lifetime events that eventually end. However, parallels can be drawn with investing during a recession

According to Simon Tryzna, chief investment officer and wealth advisor at ClearPath Capital Partners, typically, “investors stay invested during a recession in accordance with their long-term strategy.” 

As we saw in the wake of the global financial crisis of 2007 to 2008, investors should focus on their long-term investment strategy to stay true to their financial plan. There will always be short-term events that affect your investments and the stock market, but overreacting to them can derail your progress toward your long-term goals. Plan your investment strategy so it works even after a recession or pandemic ends.

As another recommendation for 2021, Travis Gatzemeier, a certified financial planner (CFP) and founder of Kinetix Financial Planning, said that younger investors should “keep investing in a down market, investing when prices are lower, as this can pay off for them five to 10 years down the road.”

While investors may be able to buy shares of stock at more affordable prices when they’re down, putting money into the stock market isn’t smart if you don’t have cash on hand to pay bills and unexpected expenses. Before putting money into investments, it's crucial to have a sufficient emergency fund. This is even more important during times of uncertainty—like when unemployment is high or there’s a global health crisis—to help cushion the blow of potential financial setbacks you might encounter. 

“Investors should also focus on building an emergency fund to cover their living expenses, should they lose their job due to economic factors impacting their company,” Gatzmeier said.

The rule of thumb related to emergency funds? Experts say save enough to cover three to six months’ worth of expenses.

How a New Presidency Affects Markets 

Investors entered 2021 knowing President Joe Biden would take office, and a new White House administration can bring changes to the stock markets that investors may feel.

With this in mind, one interesting comparison to the start of 2021 might be 2009, when Barack Obama took office amid the Great Recession. As you may remember, 2008 was a terrible year for the stock market, with the S&P 500 losing over 38% for the year in the wake of the financial crisis.

After the index hit bottom in March that year, it climbed back to end 2009 up more than 20%, followed by a gain of more than 11% in 2010. This was the start of an 11-year bull market that lasted until the market dropped in March of 2020. The Obama administration helped the economy rebound from the financial crisis and that had a positive impact on the market. It’ll only be a matter of time before we see how the market reacts to the new Biden administration and how quickly it can combat the COVID-19 pandemic.

Tryzna offered an interesting perspective on the Biden administration for investors. He pointed to “an atmosphere of transparency and predictability from the new president” which is very different from the market’s sharp reactions to some of former President Trump’s tweets directed at particular companies or industries. 

If President Biden can remain transparent and predictable, investors may be able to better understand how and when the market may move. Additionally, if Biden is able to help put a stop to the pandemic, it may have a positive effect on the stock market and economy. 

Market Forecasts for 2021 and Beyond

As with any new year, the start of 2021 brings varied stock market outlooks, as well as a range of predictions for other financial markets and the economy. Institutional investors’ insights for a new year can give individual investors trends to consider, but investing is a long-term endeavor, so it’s generally unwise for most of us to base our decisions on any short-term investment outlook.

Many investment forecasts for this year hedge their bets on the progress the U.S. and the world make at reining in the COVID-19 pandemic. 

For example, in its 2021 Global Market Outlook in January, JP Morgan Chase optimistically forecast that the S&P 500 will end the year at a record 4,400 points, up from 3,756 at the end of 2020. That would be a significant increase of about 17% for the year, similar to the gains seen in 2020, and could bode well for many individual investors because the stocks in the S&P 500 are widely held, including in retirement accounts.  

JP Morgan’s prediction for the S&P 500’s rise in 2021 is based on its view that many sectors of the domestic stock market remain undervalued compared with their pre-pandemic stock-price levels. If the pandemic comes to an end, stocks may return to levels seen before it began in 2020.

By contrast, Vanguard Investments said in its 2021 outlook report that U.S. equities would see returns between 3.7% and 5.7% for the next decade and limited returns of 0.75% to 1.75% for U.S. fixed income, namely bonds, during that same time. The firm is looking for higher returns of 7% to 9% for non-U.S. equities (both developed and emerging markets) over the next decade, too. That’s because Vanguard’s forecasts are based on the view that non-U.S. stocks are currently undervalued compared to U.S. stocks, and that means it might make investigating some non-U.S. stocks worthwhile for investors.

Major investment research firm Morningstar also has a pessimistic view of the potential returns for U.S. equities in the coming years. It forecast that, after solid gains posted by the country’s stocks between 2019 and 2020, they now don’t have as far to rise as non-U.S. stocks, which have lagged in recent years. 

3 Tips for Investing in 2021

Where you invest in 2021 or any other year should be informed by your long-term financial goals, your time horizon, and your tolerance for risk. That said, here are a few tips for investing in 2021. 

Seek Out Disruptors

Disruptor companies often introduce groundbreaking business models, change established sectors, or create brand-new industries. In some instances, the stocks of disruptors like Amazon, Facebook, Netflix, or Uber have enjoyed years of strong price growth, but this type of investment also can be risky. 

Tryzna said investors should look for “companies who are disruptors in their industries,” such as Airbnb and Tesla. He said newly listed Airbnb used disruptive technology to upend the lodging and hospitality sector. Another example he pointed to is electric car maker Tesla. Tryzna said to look for other such companies to invest in that are disruptors in their industries in the same way. 

To hedge risks posed by disruptor stocks, experts suggest considering a disruptor mutual fund that balances a particular theme with exposure across a range of companies and sub-themes.

As with any potential investment, you should research the company to determine if its role as a disruptor will translate into an investment that will be suitable for you and your financial situation.  

Think About Consumers’ Needs

Gatzemeier said that once the pandemic is under control, people will be ready to get on with their normal lives again. He said companies in a variety of industries that serve these needs might be good options for investors to consider in 2021. For example, during the pandemic, consumers were traveling less. Widespread vaccines and herd immunity may make traveling more popular again soon. Stocks in these types of sectors may gain price momentum again after months of stagnating during the pandemic.

Look Overseas

Another 2021 global outlook report from Russell Investments also preferred non-U.S. equities to U.S. equities.

“The post-vaccine economic recovery should favor undervalued cyclical value stocks over expensive technology and growth stocks,” the report said. “Relative to the U.S., the rest of the world is overweight cyclical value stocks.”

Cyclical stocks tend to move in line with market and economic conditions, while value stocks are those that the market currently undervalues. In other words, during 2020, as a result of the pandemic, we saw technology and other stay-at-home stocks do well, causing a number of other well-established names to lag. Russell wrote in the report that there are a large number of these undervalued stocks in many markets outside the U.S. that may be lucrative for individual investors.

The Bottom Line

Any new year brings challenges and opportunities for investors. As we look at how to invest in 2021, there is perhaps more to consider than in most new years. A new U.S. president and a stubborn global pandemic both present major health and economic issues to factor in to portfolio choices. 

Looking at market and sectoral performance during and after our last recession could provide some guidance. But, as always, it's important to make investing decisions based on your unique financial situation and circumstances.