It's A Wrap! - 2021 In Review

As we close 2021, it's a good time to review how we dealt with the events that shaped the year. At the onset of 2021, the world was dealing with the impact of COVID in many different ways. In the US, high-momentum digital growth companies were beginning to slow as the rest of the economy was returning to a more "normal" state of business. Outside the US, many countries began economic recovery, but with much less momentum due to their regional conditions, and their governments' financial responses to COVID 19. In the USA As 2021 got underway, we saw consumer discretionary sectors like travel, autos, housing, entertainment, and big ticket items really accelerate as combined pent-up demand and very high levels of personal savings set the stage for a historic run up in demand for these goods and services. As the year progressed, the demand for consumption in these areas fueled supply chain issues with manufacturing, logistics, transportation, and distribution of all goods. Theses supply constraints began to cause shortages and delays in nearly all parts of the economic system by Q3, which by Q4, translated into rapidly rising prices in nearly all sectors of our economy. Inflation By mid-year, economists begin to discuss the impact of inflation and debated as to whether or not it would be short-term (transient) or longer-term (structural), and the outcome of this debate would be a guiding post for our Federal Reserve to make further adjustments to our nation's money supply. Mid way through Q3 ,the Fed adopted the position that this inflation may not be transient, and began to voice its intention to "begin" to bring in the money supply and raise rates in the "coming year". This policy shift by the Fed represents a directional shift that many people have not seen in their lifetime. As the markets try to understand what this means for stock prices and economic growth, market volatility increased in the second half of the year causing investors to see a couple months of negative returns in most asset classes for the first time since the onset of COVID.

Santa Claus Came to Town (late) As we wind down the last week of trading for the year, the "buy the dip" crowd showed up and bought US stocks late into the closing week of trading, pushing several indexes to new all time highs.

How did we do? In thinking about the various positions that we had in accounts in 2021 as well as the overall advice we gave our clients this year, we would conclude that this year was an overall successful year. If we were grading our work, probably would receive an "A-" this year. Here are a few noteworthy items that would go into that grade: Overall participation in the broad US stock market: A Our investment exposure in the US was higher in all of our various models than in most years of the past 20 years. Exposure to Risk (measured by portfolio standard deviation): A+ Overall our portfolios produced much lower ranges of price volatility that historical years leading to the end returns achieved in 2021. Avoidance of pitfall sectors: B Specifically for our Aggressive Growth clients, we held a portion high growth / high momentum stocks in these accounts. This sector finished down around 20%. If we had a perfect crystal ball, we may have chosen to sit out this year with these momentum brands. But, it is prudent for aggressive growth investors to maintain some exposure to this sector, even when the sector is out of favor. Global Positioning of Assets for Returns: A This year, we had the lowest allocation to non-US stocks that we have carried in over a decade. Given that the US markets had noticeably higher returns than non-US this year, that is a win. However, it's noteworthy that the small positions that we have in Emerging Markets are down slightly for the year. Managing Interest Rate Risk: A+

This year, we carried numerous fixed income positions in accounts that actually benefited from rising inflation and produced positive returns well above the Barclays Agg Bond index (which as of this writing, is down 1.59% in 2021.) The fixed income part of portfolios will undoubtedly be the most difficult to manage without taking too much interest rate risk in the years ahead. Tax-Efficiency: B- 2021 will be a standout year in taxable accounts where the amount of taxes clients owe will be more than "normal". We had time-based positions that we were carrying through the COVID crises, that allowed us to have some protections against the early unknown downside losses that came with a global pandemic. These positions expired in 2021 and we had to book the gains. Also in 2021, we shifted from our old fund-based risk management holdings to our new ETF (exchange traded funds) based holdings. That triggered the realization of gains early in the year. It is unfortunate that we expect higher taxes this year due to these repositioning trades, but the new structure will allow us to defer nearly much of the future gains on these ETF for many years. Providing Timely Guidance for Clients: A+ We worked diligently in 2021 to keep our clients informed about opportunities to make individual decisions to take advantage of specific timing of things that can help them with their financial plans, to share concepts that can help them target lower income taxes, and even getting things sold during market strength to deal with other obligations that they may have. We got a lot of things right this year. Bottom Line: 2021 was a good year for investors, despite seeds of inflation, rising interest rates, and long-term supply chain issues are sown into expectations for the markets going forward. We constantly evaluate the economic landscape, (and also our own processes) to find ways to help our clients intelligently pursue their financial goals with confidence. As always, thank you for the opportunity and privilege of serving you and your families! Let us know if you have any questions or concerns.

- Lyn