Yesterday, I wrote about some of the big winners of the pandemic. This certainly includes anyone who held a decent position in the stock market. Although they saw steep falls at this time last year, hitting rock bottom 23 March 2020, the recovery has since taken most indexes to their all-time highs, and been close to 100% for “the big 3” since this time last year. Most low fee index funds with any respect for themselves are also up 50%.
But now that we’re well into 2021, at record highs for most indexes, how should we invest?
Low fee index fund has long been the most reliable way to build wealth, but which ones should you pick in 2021? Image source: UTI: What Is an Index Fund & How Does It Work?
Seeing these new records being breached every week, it's easy to grow some fear of heights. And while there sure is no shortage of doomsday prophecies about how an ugly correction is inevitable, this has been said for years. So assuming that one does want to either start investing now, or continue to do so regularly, what funds should one pick going forward?
The impact of vaccines, re-openings and interest rates
A lot will come down to the expected changes in interest rates. As I wrote in my article As the world returns to normal, will increased interest rates cause a correction in Bitcoin and crypto?, the world's large economies are likely to see some recoveries towards summer following vaccinations, and thus also look to return interest rates slowly up towards "normal".
Although the big global stock exchanges are at record highs, some industries have suffered the past year. Airliners, hotels, and travel-related businesses are the obvious cases, but with less economic activity, traditional industries like oil & gas have also lagged behind the fun. If one believes that the large economies are on track to steadily re-open and return to normal without any nasty surprises, then all-else-equal going back into these industry-stocks would make sense.
But as is usually the case, balancing one's position to also consider other plausible scenarios tends to be a better option.
Tech and growth companies vs traditional industries
The big winners the past year are without doubt growth companies and technology companies. Tech companies have benefited from more people working remotely from home needing webcams and other home office equipment, people subscribing to Netflix and buying video games or other online entertainment. Growth companies have benefited from a low-interest rate to have lower expenses as they borrow money to fund their growth and development.
In other words, they've mostly benefited from the opposite conditions as more traditional industries. So while heavy industries may benefit from a re-opening and normalized economy, tech and growth sectors could be hurt by the same changes. In other words, it offers room for diversification. Even though re-opening may seem plausible, there is always a chance that new mutations, or less effective vaccines than promised, will cause delays and further shut downs. Having a feet in both camps can therefore be smart.
So what am I doing myself?
For the past few years, I've been putting a fixed amount of money into low fee index funds every month, with an additional purchase of stocks towards the one's I believe the most in should I end up saving more money that month than I had budgeted for. Currently, of the money I put into index funds each month, I let 60% go into "industry-oriented" funds and 40% into "tech-oriented" funds. My opinion is that the re-opening of the economies, interest rates returning towards normal rates to combat a wild and uncontrolled real estate market, will mostly benefit “traditional” industries. However, experience has taught me to always place some bets against my own beliefs. If always go 100% for what you believe, you will eventually be 100% wrong. And that’s expensive. Thus, I'll keep diversified, while adding a slight edge to the scenario I believe is most likely, without going all-in on it.
So there you have it, that’s my current strategy and what I would advise if you asked me. How are you guys investing and/or saving these days? And who do you think will be the biggest winners in the next 6-12 months?
As always, I’m curious to hear you opinion in the comment section and will always upvote good comments :).
Have a great weekend and happy easter!
Fredrik