For many of us, 2020 has been a year to forget. But the deployment of Covid-19 vaccines globally, is already underway. So in the interest of laying the groundwork for a more prosperous 2021, Forbes editors have gathered some profitable advice for investors and savers.
Despite the stock markets’ recent record levels, Jeremy Siegel, Professor of Finance at the Wharton School of the University of Pennsylvania expects that the good times will continue in 2021.
“We have had a lot of repressed spending. Money is just sitting in accounts ready to be spent which will benefit the market on a whole,” Siegel says, noting a sharp increase in the money supply which accounts for household savings and deposits.
For certain sectors, decimated by pandemic business closures and still suffering, the recovery—and investment returns—will be much greater. Travel, leisure and hotel industry stocks, for example, are still down as much as 40%. “Everyone that didn’t go to Disney in 2020 is probably going in 2021,” Siegal notes. “Financials could also come back stronger as loan loss provisions diminish giving banks extra earnings during the year,” he adds.
Historically, small companies have performed well coming out of recessions, and already the Russell 2000 index of small stocks is up 20% in the last three months versus 7% for the mega-stock filled S&P 500. An easy way to invest in the rebound with small caps is via broad indexes like iShares Russell 2000 ETF (IWM) or Vanguard’s Small Cap ETF (VBK).
Turnaround investors looking to invest in the biggest casualties of Covid-19 should consider Invesco Dynamic Leisure and Entertainment ETF, a fund that holds a diversified group of big companies such as Disney, Hilton, restaurant supplier Sysco, Brinker International, TripAdvisor and Live Nation. For a pure-play in the recovery of air travel, consider U.S. Global’s Jets ETF which has $3 billion in assets and holds dozens of big airlines, airports and suppliers to the airline industry. Hotels are likewise at bargain prices. The strongest among the hotel industry real estate investment trusts is Apple Hospitality REIT (APLE), which owns 235 upscale hotels in 34 states.
Richard Saperstein, who manages $9 billion in assets through his New York-based Treasury Partners, warns that things are likely to get worse before they get better. He says there will be a dark three-month period in the country before the vaccine cavalry arrives to begin its rescue operation. “We will recover in 2021 but we won’t get back to 2019 levels until 2022,” he says.
Yes, President-elect Joe Biden has proposed tax hikes on corporations, on individuals earning $400,000 or more, on long term capital gains of those with income above $1 million and on estates worth more than $3.5 million. But don’t make any panicky moves. Big tax hikes aren’t on the near horizon, even in the unlikely event that Democrats win control of the Senate after two special runoff races in Georgia in January. Both the Covid-weakened economy and the more conservative members of Biden’s own party weigh against that. The long term? That’s another story. With the federal debt-to-GDP ratio on track to reach the highest level in the nation’s history and the Trump individual tax cuts set to expire at the end of 2025, rate hikes on at least high earners seem inevitable.
So consider realizing some long-term gains while rates are historically low and the market high. Pay attention to where you hold assets—bonds throwing off ordinary income and funds that churn out short term gains should be in tax deferred retirement accounts. Look to diversify your long-term tax risk, by saving for retirement in special Roth accounts. (You get no deduction now for money going into a Roth IRA or Roth 401(k), but all withdrawals in retirement are tax free.) Finally, if you are truly wealthy, consider making gifts to family members to make use of 2021’s generous $11.7 million per person ($23.4 million per couple) estate and gift tax exemption.
There is an old saying among successful investors, “the trend is your friend,” and nowhere has that been more apparent than in the stock market where big successful technology companies deploying cutting edge innovations, from cloud computing to artificial intelligence and 5G, seem to go from strength to strength.
“Digital transformation is the biggest, most investable tech trend in a generation, on par with what our great-grandparents experienced in the development of electricity,” says Jon Markman, editor of Fast Forward Investing and CEO of Markman Capital. “The pandemic laid bare the importance of this transformation. With workers and consumers holed up at home, virtualizing meetings, online shopping carts and streaming media kept the economy out of a certain depression. These trends are not going away.”
For long-term investors this means making sure your portfolio has a healthy dose of companies involved in such disruptive technologies as autonomous vehicles, genomics, big data, 5G, artificial intelligence, robotics and targeted cancer therapeutics. Luckily some of the biggest members of the S&P 500, companies like Google, Amazon, Microsoft, Visa, Verizon and Pfizer are already knee deep in these leading edge innovations. Simply owning this market capitalization weighted stock index is effective.
For those wanting a more concentrated approach to innovative companies there are numerous mutual funds and ETFs. One of the best is actively managed Ark Innovation ETF (ARKK). Its stated mission is to invest in companies offering new products and services that “change the way the world works.” This five star-rated mutual fund, whose three biggest holdings are electric car company Tesla, genetics testing firm Invitae and small business fintech Square, is up 128% year to date and has a five-year average annual return of 43% according to Morningstar.
If you’re in your 50s or 60s, or already retired, it’s time to take a fresh post-pandemic look at your retirement plans as well as your portfolio—even if you’ve been able to maintain your income and didn’t panic and sell when stocks tanked in February. Maybe you were banking on working well past normal retirement age? As this year’s retreat of Baby Boomers from the labor force has once again demonstrated, job loss and health shocks (or in the case of Covid, health fears), could accelerate your planned retirement date. There are ways—beyond simply saving more—to plug any developing holes in your plan. You could relocate to a cheaper locale; with the growth of work from home you may be able to do so even before you retire. Or consider developing side gigs or even starting your own business to provide extra income in the early years of your retirement, with the goal of generating enough income to delay claiming Social Security to as late as 70, thus earning yourself a bigger, inflation-adjusted check from Uncle Sam.
As for your portfolio, with interest rates so low, the traditional prescription of a bond heavy portfolio for those in and approaching retirement may not cut it. A smarter strategy could involve holding more stocks but hedging risk. At the least, before you decide on an asset allocation and how much risk you’re willing to take, analyze the percentage of your basic monthly expenses that will be covered by protected sources of income—meaning Social Security, traditional monthly pensions and annuities. If that share is high, you might find yourself with a greater appetite for risk—and stocks—in your portfolio.