You can’t blame people for wanting it all, substantial portfolio income coupled with sustained capital growth, all with no risk to principal. Experienced investors know that the financial markets don’t work that way, that reward is a function of risk, and prices go down as well as up.

Inflation

The “elephant in the room” for 2022 is inflation, which in 2021 was the highest in 40 years. Overall inflation for the year was 7 percent, but some categories had far greater price increases. It should be noted that the nearly 50 percent increase in the price of gasoline came after a price decline during the pandemic year of 2020, so some of that 2021 increase is just a return to normal. Still, the overall increase in all energy costs will have a ripple effect throughout the economy, putting upward pressure on most goods and services.

To some extent, the 2021 inflation was caused by supply chain problems that may ease in 2022. However, employers are also encountering a surprising labor shortage. The number of unemployed individuals per job opening at times has been less than one, meaning for every job opening, there has been less than one applicant to fill it. This has created competition among employers to hire candidates, and that drives up salaries and wages. For employees, that may be wonderful, but for consumers it likely means that rising prices are here to stay for the near and intermediate term. Companies have to pass on their increased costs to their customers.

Bonds

Bond prices fall as interest rates rise, and longer maturity issues tend to fall the most. The Federal Reserve has been slow to react to the recent inflation, characterizing it as “transitory” for much of 2021. That is expected to change in 2022, as the Fed raises interest rates to combat persistent inflation. The timing and magnitude of those increases remain open questions, but investors need to be prepared for them.

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Diversification is key in bond portfolios. First, make sure that your bond portfolio acts like a bond portfolio and as a countermeasure against falling equity prices. Understanding what you own is critical. For example, a bond portfolio that correlates to equities by having too much high-yield exposure could be detrimental in a market sell-off.

Stocks

Equities had a spectacular 2021, with exceptional earnings growth following the sharp contraction in 2020. For example, in the second quarter of 2021 the S&P 500 year-over-year earnings grew by an eye-popping 92.4 percent, after growing 52.6 percent in the first quarter of the year! Earnings were robust through the second half, powering stock prices to ever-higher levels.

That trend may change in 2022. The price of a stock is what an investor is willing to pay for a stream of future earnings. Therefore, the price/earnings ratio is a measure of how expensive a stock is relative to its expected earnings. The p/e ratios of many stocks have reached very high levels by historic standards, suggesting that many have become relatively quite expensive. Value stocks and smaller company stocks, both of which tend to have lower p/e ratios, may look better by comparison.

The value of trusted advice

Finding good help for investment management is no easy matter. You have to find someone with experience and expertise, someone you can trust, someone with whom you feel comfortable.

That someone should be us. We offer unbiased investment advice, designed with the needs of you and your family in mind. We utilize a team approach to investment and financial management, with professionals from a range of disciplines to provide you with a complete financial management solution.