2021 has been an interesting year. Many things have changed – I moved cities after 25 years in Atlanta, switched industries, and got engaged. And yet…in many ways things have stayed much the same. The news cycle starts with COVID, follows with interest rates/inflation, and ends with geopolitical tension.
For this review I am going to cover:
- My 2021 spending / saving habits
- My past market predictions vs. reality
- My current portfolio
- My predictions for 2022
Savings: Personal savings performance
My personal savings rate stayed remarkably consistent from 2020 (within 1%) and came in at 78% for the year despite moving to a higher cost of living city.
This is, however, a slightly misleading number as my income increased, so maintaining a savings rate means my expenses increased as well. My goal when it comes to expenses has been to only allow thoughtful lifestyle inflation (e.g., only allow my level of expenses to increase in ways that meaningfully improve my happiness / quality of life). For me, the two things that do this the most are experiences and convenience (I usually look at the pain points in my day-to-day & outsource one additional thing each year).
When I looked at just the increase in my expenses this past year, they actually increased ~60% YoY, which is a startlingly high amount. After looking into this in more depth ~50% of that increase was due to changes in my fixed expenses (e.g., rent & utilities) that came from moving to a higher cost of living city and the rest was because I returned to a more normal level of spending after a COVID-induced incredibly frugal 2020 (e.g., took a few domestic trips and made some larger one-off purchases)
When looking back at my monthly expenses, I am fairly happy with the areas where I saw lifestyle inflation:
- Trips – I took 8 domestic ‘trips’ ranging from spending a weekend in a cabin in Asheville to spending a week skiing with old friends. These are great memories and I never mind spending on experiences.
- One-off purchases – I looked back at each of my largest purchases and am very happy with where I spent money this year (e.g., buying a digital piano that I use almost daily). My barometer with these types of expenses is I have to be able to look back on them a month later still find them to be a source of happiness.
Savings: 2022 expectations
Going into 2022, I already know my expense baseline is going to jump. My fiancé just started her MBA in NYC, so between doubling my rent expenses (already ~40% of my total expenses for 2021 and closer to 55% in the 2nd half of the year) and traveling to and from NYC, I will likely have a ~50% increase in expenses.
PSA: Living with your SO is an incredible way to keep rent low.
The main reason to be hopeful is my income will also increase substantially as I will have a full year in my new job, so it remains to be seen what will happen to my baseline savings rate.
Investing: Past predictions
The 2nd tenet of my personal finance machine is investing. While I don’t tend to change my personal portfolio too much based on my expectations for the market, I like to track how correct (or incorrect) my predictions are. The following predictions were made in Q1 2021.
Again, as I always caveat, I am not an economist…and even if I was these would all be guesses. If anyone actually knew with certainty what was going to happen to interest rates they wouldn’t be writing about it.
Prediction 1: Correct. This is not that bold of a claim, but I expected economic data to continue to support the S&P 500 higher through the EOY. At the time it had just crossed 4000. As of the time of writing this, it is at 4780 (~20% higher) and has had 69 record closes so far this year. Strong earnings supported by the heightened consumer demand, job growth, continued government spending, inflation, and not too fast a pace of interest rate hikes have all supported equity markets through the year far higher than I probably expected back in Q1.
Prediction 2: Correct. I expected growth to be more volatile this year given the nature of the recoveries sensitivity to interest rates/inflation and as a result committed to buying any dips >2% when they occurred. This allowed me to allocate a reasonable amount of cash this year and has at least so far proven to be a good idea.
Prediction 3: Mostly Correct. I expected inflation across the board to continue to come in hotter than predicted. My very anecdotal rationale is that people’s heightened personal savings & willingness to pay for particularly services would skyrocket post vaccination and that would push prices up. Prices rose 6.8% YoY in November with energy leading the way. What I didn’t count on was how much of an impact supply chain issues would continue to have even through the end of the year.
Prediction 4: Partially Correct. I expected real estate values to continue to climb supported by strong homebuying demand from Millennials but expected that price growth to slow as the supply chain worked itself out and lowered the price of commodities like lumber. While real estate values did continue to climb (the median home price is up something like 18% YoY), that growth accelerated in the latter half of the year and supply chain issues stayed a reality. Additionally, while some of that growth came from Millennial homebuying, it was also driven by institutional money flooding into single-family residential homes.
The one thing I have done as a result of my market predictions is avoid holding too much cash.
With my bet on inflation, holding cash (even in a high yield savings account) is essentially hemorrhaging money. Given that inflation is somewhere in the range of 5-7% and a high yield savings acct yields ~0.5%, you are losing 4.5-6.5% in purchasing power every year. The core issue is that the ‘real rate’ or treasury rates minus the rate of inflation is very negative right now.
Investing: My portfolio
- US / International Equity ETFs: 80%
- Cash / I-bonds: 5%
- Real estate: 5%
- Alternatives / Sector bets: 10%
My portfolio has not changed much from a year ago. The main changes I made this year:
- I-bonds: I have maxed out how much I can put in Treasury I-bonds (bonds whose interest rate fluctuates with inflation). They are currently yielding 7.13% locked in for 6 months and I can cash them in after 1Y (with a small lost of interest) or after 5Y with no loss of interest. Given that the 10Y treasury is at ~1.5% right now, I think this is a great opportunity. Even if inflation somewhat moderates, these should perform well and are better than holding cash
- Alternatives: I have increased my alternative exposure / sector bets / non-traditional assets as I have seen pockets that I want to increase my exposure to. I like keeping my bets <10% of my portfolio if I can, but expect my alternatives exposure to increase as a result of my current job
Investing: 2022 Predictions
I have very few changes to my investing plan for 2022. My very high-level expectations are as follows:
- S&P will end positive: We will not have a major market correction (-20% or more in 2022) and the S&P will end positive for the year
- Market will stay choppy: We will have continued market choppiness as the world keeps a close eye on the Fed’s reaction to heightened inflation
- Real estate prices will grow: Real estate prices will continue to climb, albeit at a slower rate than 2021
- COVID will still be a thing: COVID rates will come down precipitously from the boom in December 2021, but we will still be dealing with the disease at the end of the year
- Supply chain issues will moderate: You will be able to get your furniture in a more reasonable amount of time
- Non-traditional asset growth will slow: Many people (including myself) have been pushed very far out the risk curve at this stage, which has resulted in a boom for non-traditional assets like crypto, collectibles, NTFs, etc. I expect that people will find some effective ways to monetize these, but at the same time the pace of growth will slow as we transition from a theoretical valuation of what they could become to a more realistic universe of what they end up becoming. Either ways I will continue to hold my existing exposure
All of this leads me to maintain my current investing strategy & keep an eye out for any opportunities to start buying into income generating assets.
My biggest concerns for the year ahead:
- US / China tension accelerates: This is by far my biggest near-term macro concern as it would be the most obvious trigger for global catastrophe
- COVID adapts to the vaccine & becomes more deadly: While this is not my guess as to what will happen, another round of lockdowns, heightened hospitalizations, etc. sounds like a worst-case scenario
All that being said, I am still hopeful for 2022 and think we will have a much better year than those in the recent past. Maybe I am too much of an optimist, but I’m looking forward to seeing what 2022 has in store.
RWM
