For most U.S. investors, 2021 was a great year. Despite ongoing pandemic concerns, the stock market continued to rise up and up. However, 2021 is now over and we’re looking ahead to the next 12 months. Or as my old boss would always ask, “what have you done for me lately?” My normal response was something like “Umm, remember last week when I… never mind. You’re right. Let’s think to the future.”
Investing can be very similar. The strategies that worked in 2021 may or may not continue to be profitable in 2002. New trends emerge and various industries go through up and down cycles all the time. Let’s take a look at what’s in store for us this year as investors.
Cryptocurrencies Are Going (More) Mainstream
You knew this one was coming. I’m not talking about just Bitcoin and Ethereum. Or even memecoins like Dogecoin or Shiba Inu. The cryptocurrency industry is exploding fast. With so much financial incentive, its bound to attract plenty of investor interest.
The crypto industry is quickly expanding its reach and maturing. Unless the government decides to severely clamp down on the industry with regulations (or shutting it down completely), crypto investments will continue to rise in popularity.
Crypto.com recently bought the naming rights to the formerly named Staples Center. For those unaware, it’s where the famed Los Angeles Lakers play. It’s a marketing move, designed to attract even more investors to their platform. Do you really think Fidelity or Charles Schwab are going to just sit around and wait for the newcomers to eat its lunch?
At this rate, it’s only a matter of time until all major brokerage firms offer cryptocurrency investments to its investor base. This will only grow the industry even more, dampen volatility in the process (maybe), and make it even more palatable as an investment. On the other hand, the start of 2022 saw Bitcoin prices drop to just over $41,000 USD per coin. That’s the lowest its been in six months, and a steep drop from it’s all-time high of almost $70,000.
ShutterstockThe Projects Behind Cryptocurrencies
This really deserves a whole separate column, but we’ll give you the short version. Most people invest in cryptocurrency by buying a coin (like Bitcoin) and hoping to sell it later, for a higher price. There’s nothing wrong with this strategy, and it could net you some profits. However, cryptocurrencies are about more than just trading coins for short-term profits.
The technology is built on something called the blockchain, which has other uses. You’ve probably heard of NFTs (non-fungible tokens). Many people are rightly scratching their heads at the concept. I mean, who would want to pay hundreds (if not millions) of dollars for the rights to a digital photo? Especially when it’s so easily recreated, copied, and re-saved as many times as people want.
Despite these valid concerns, the NFT market continues to gain traction. It’s being embraced by the art, music, movies, television, and video game industries. It’s still in its infancy, so the future is unclear — but full of potential. Eventually, someone will be able to figure out a model that makes sense. Be ready to see many opportunities to invest in these projects pop up in 2022.
Stablecoins Continue to Expand
Stablecoins is another cryptocurrency that is only going to grow in popularity this year. (Once again, assuming the government doesn’t take steps to regulate the industry). These coins are designed to closely track the dollar. In theory, that makes them more “stable” than decentralized offerings like Bitcoin. There are companies out there right now offering 10% or more APY on your deposits, which then get converted into stablecoins. You read that right — 10% and sometimes even more.
Remember that there are no free lunches though. For one, the money you hand over isn’t FDIC insured. There are other risks involved, too. The company offering these accounts could go under completely, taking your money with them. There are also regulatory risks. There’s also a chance that the stablecoin can’t track the value of the dollar if there’s a rush of withdrawals, tanking the price.
However, for those who are willing to look more closely at the nuisances (and are comfortable with the risks), these deposit accounts are at least worth checking out.
Direct Indexing
The strategy has been around for years. However, it’s gaining more mainstream traction lately. The idea is that instead of buying an index fund like the S&P 500, you simply own all the underlying stocks instead. By doing so, you can sell any individual stocks that have lost money during year end. Then, you can capture those losses to offset taxes, while leaving the winners alone.
It’s a tax strategy that can have big implications. Shomesh E. Chaudhuri, Terence C. Burnham & Andrew W. Lo published a paper in 2020 to show that investing using a direct indexing strategy beat owning the 500 largest U.S. Common Stock by 1.08 percentage points per year, from 1926 to 2018.
ShutterstockThe Cons of Direct Indexing
It’s not all roses, though. The biggest problem with direct indexing is that the tax benefit diminishes as time goes on. Eventually, all the losses will have been captured and you are left with only stocks that have gains. Of course, having winning stocks is a good thing. But paying more taxes is never fun. Even still, maintaining the strategy (and its associated costs) will stick around forever.
Direct indexing also makes switching to a different strategy in the future much more costly. That’s because if you squeezed out all the losses through the years, you’ll be left with a higher unrealized gain in your portfolio. Again, there’s no free lunch there.
For those interested though, Wealthfront already offers a direct indexing solution for a portion of its clients right now. Vanguard also recently agreed to buy a direct indexing technology provider. They are likely to offer some type of direct indexing solution to its advisory clients in the future. Look for more direct indexing options in to emerge in 2022.
The Metaverse
This was all the rage late at the end of 2021, and the buzzword will only continue into 2022. It’s estimated that the Metaverse industry will become a $800 billion opportunity by 2024. Look for the phrase to pop up everywhere, as tech companies pile in to get a piece of the action.
Just be careful here though. The promise is that one day we’ll get to experience a digital fantasy world, which is so real you can almost live a second life within it. Some think this will become a reality soon. Apple added hundreds of billions to its market capitalization just because it’s rumored to be working on a virtual reality goggle. For others, this is just a pipe dream that’s never going to come to fruition. The reality is probably somewhere in between. Have a realistic expectation but be ready to invest. Virtual real estate plots in the Metaverse have already been bought and sold for serious money.
ShutterstockFed Up With Fed
It’s always the Fed, but expect the Fed and their interest rate decisions to dominate the headlines even more in 2022. The Federal Reserve is expected to start raising rates this year, after multiple years of rock bottom rates. The action starts to get interesting whenever the rates start to move.
Long term investors really shouldn’t bother. Pick an asset allocation you are comfortable with and continue to ignore the noise. Short term traders, however, should be ready to take advantage of any rates moves (or lack thereof) that surprises the consensus.
Non-Stop Inflation Talk
Inflation will hopefully calm down a bit eventually. However, it’s still going to be the talk of the town for a while. The sad part is that while the right time to invest in inflation protection has likely past, you will continue to hear everybody telling you that you need to protect yourself against inflation by investing in bonds like Treasury Inflation-Protected Securities.
The one exception is i-Bonds, offered directly through TreasuryDirect.gov. They never go under par value when you sell, so you are protected in more ways than one. It’s a bit of a hassle to open a separate account for it, but it’s well worth the effort for 2022.
ShutterstockCOVID-19 To Infinity… and Beyond
We are hitting the third calendar year three of the pandemic and there’s really no end in sight. It feels like the majority opinion is that we’ll just have to learn to live with the virus, hope the vaccines keep the majority of people from falling deathly ill, and move on with our lives. Other parts of the world are maintaining strict lockdowns and quarantines. Whichever strategy you subscribe to, Covid remains a very real factor in today’s economy, which means it definitely impacts how you invest.
It’s likely that 2022 will continue to offer tremendous opportunities for traders looking to cash in on the volatility that these government mandates will have. Expect big movement for anything related to travel or tourism, and be ready to jump in (or out) quickly.
The Bottom Line
We’ve been spoiled with almost two years of relentless investment gains. Some of us might have forgotten that prices can actually go down once in a while. It’s 2022, with all that’s happening and the Fed already signaling that they are ready to lift the rates this year, the good times may be ending.
No one has the crystal ball, of course. Just be mindful of possible volatility this year. Only invest according to your need, willingness, and ability to take risks.
