What a ride it has been for everyone in 2021. In some ways it felt like an extension of 2020 – the pandemic did not end and everyday life was still impacted. At the same time though, we saw new issues arise in the economy. Inflation started to rear its ugly head, and it was said to be transitory but now has experts wondering if it could be permanent. Home prices, grocery prices, and other everyday staples saw price increases, and no one knows if it’ll slow down in the upcoming year.
Knowing all of this, how do you come up with your investment plan for 2022? In this article, we’ll discuss how to come up with a game plan for investing and review the major asset classes to provide insights on how it could impact your portfolio for 2022.
Coming Up with Your Investing Plan
Your risk tolerance will be the most important factor in determining your investment plan in the upcoming year. To determine your risk tolerance, you will first need to review your personal financial situation. A couple of questions to ask yourself are:
- How has your financial situation changed over the year?
- What is your current portfolio? Is there a need to rebalance amongst asset classes?
- What is your tax situation and your tax goals for the upcoming year?
- What is your risk tolerance? Has it changed due to a change in your financial situation?
For example, if your financial situation improved significantly over the year, your risk tolerance may increase, all else being equal. If your portfolio had major gains in a significant asset class, it may make sense to rebalance it so your asset allocation still aligns with your investment plan. Finally, it also makes sense to look at your tax situation before you sell any of your assets.
On the other hand, if your financial situation deteriorated over the pandemic, your risk tolerance may have decreased. In a situation like this, you also have to balance your risk tolerance with inflation, as holding cash can potentially make you lose money if inflation continues to be high.
Let’s next look at the investing landscape for the upcoming year.
Review of the Investing Landscape
In our review of the investing landscape, we will focus on two popular investment asset classes, real estate and the stock market.
Housing Market
The housing market was a focal point of 2021. According to MarketWatch, housing prices went up by nearly 20% in 2021. This was caused in part due to high demand and low supply, which led to bidding wars that drove home prices to extraordinary levels.
While there’s no crystal ball saying what will happen in the future, some experts believe that home prices will still grow, albeit more modestly, in 2022. With interest rates still being so low, it could still make sense to invest in rentals if you’re able to find deals at reasonable valuations. In the long run, real estate almost always grows and serves as an inflation hedge. Questions (not an exhaustive list) to ask yourself if you’re considering investing in a rental in 2022 are:
- What is the valuation? Does the rent rate make sense compared to the home price?
- What are the current rent rates compared to historical rent rates?
- Is the area safe?
- Will you be able to find a qualified tenant in this area that will pay rent consistently?
- If you are borrowing will the property cash flow?
- If there’s a downturn in home prices or rent rates, how will you fare? Will the deal still make sense in the long run?
Depending on your answers to questions like the above, the housing market may be a good asset to allocate your capital in the upcoming year.
Stock Market
Real estate often requires significant capital to participate in. In comparison, the stock market is much more accessible. All you need to do is sign up with a broker to get started. If you have trouble deciding which broker to use, you can see here a comparison of two popular brokers – Etrade and Robinhood.
The stock market had a great run in 2021. As of December, major indexes such as the S&P500, Dow Jones, and Nasdaq all increased double digits year-to-date. Interestingly enough, some “stay at home” and pandemic stocks saw a sharp fall from peaks. One example is Zoom (ZM), which rose sharply during the pandemic but has had very poor returns for 2021. Some of these beaten-down stocks may present interesting opportunities, depending on their individual circumstances and how the stock market performs in 2022.
This brings us to the next question, which is what’s going to be the outlook for 2022? It seems like many Wall Street firms believe that the S&P500 is poised for gains in 2022. Of course, analyst estimates are just estimates and should definitely be taken with a grain of salt. But it’s also worth noting that in the long run, the stock market has usually gone up.
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Crypto
Crypto also fared relatively well in 2021. Major cryptocurrencies such as Bitcoin and Ethereum have seen a surge year-to-date. Facebook changing their name to Meta has also fueled discussions around crypto and how blockchain will work within the Metaverse.
Another hot buzzword has been Web3.0. Many people are looking forward to a newer internet: one that is more decentralized adopts virtual reality and allows its users to have active ownership and input. All of this makes crypto a very intriguing asset class with great adoption potential in the coming years.
At the risk of stating the obvious, investors should note that crypto is highly volatile and should be only invested in with great caution. Although crypto has gone up significantly in the previous few years, downturns have often been sharp and sudden. It’s best to invest only what you’re willing to lose. Additionally, it is imperative to be aware of the many scam coins and “rug pulls” that occur in crypto as there is not yet widespread regulation.
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Conclusion
Although most people are busy celebrating the holidays, reviewing your portfolio and coming up with a good investment plan for the upcoming year is prudent. It is important to review how your portfolio and personal financial circumstances changed in 2021, as it may have an impact on your risk tolerance and investing goals. Most major assets including the housing market, the stock market, and crypto grew in 2021. With all of these major assets coming out on top for the year, it is important to exercise caution in 2022 while protecting your assets.
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