How to prepare for 2022 as an investor
If you think 2021 was difficult to be an investor, 2022 could be even harder
Next year is rapidly approaching, and after all the volatility lately, 2022 cannot arrive soon enough. Investors are now confronting the double whammy of the new Omicron variant and a more hawkish Federal Reserve.
With continued gridlock in Congress and possible tax increases on the horizon, investors are understandably confused as to which direction the market is heading.
With less than a month to go in 2021, what should an investor do now to be well-positioned for the new year?
Take Tax Losses to Offset Gains
Equities across the board are up by more than 20% for the year, with technology performing particularly well. Cryptocurrencies like Bitcoin and Ethereum have doubled in value. Meme stocks, like AMC and GameStop, which have gained a strong following on social media, have exploded this year. If you have sold any of these during the year, you could have massive gains.
Check your taxable portfolios to see if you have any losses to use against these gains. As always, consult with your tax advisor, but selling your losers may lower your tax bill in April.
Decrease Bond Holdings
Maybe you have too much money invested in low-yielding bonds. Longer duration or interest rate sensitive bonds could get hurt in a rising interest rate environment. With the 10-year U.S. Treasury bond only yielding 1.5% today, and inflation running at over 6%, odds favor two to four interest rate hikes in 2022.
If the Federal Reserve does start raising interest rates next year, a 1% move higher in rates on the 10-year bond will mean a 10% loss. If we experience worse than expected inflation, bonds could be a disaster.
Bet on Equities
This may be the time to consider increasing the allocation of stocks in your portfolio to 70% and lowering bonds to 30%.
If interest rates rise in 2022 because of inflation, bonds will underperform stocks. Inflation also helps companies in the cyclical/value sectors like those in the financial, energy, and industrial industries because they can raise prices in response, which increases their profits. So, you may want to have some exposure to these stocks as a hedge.
Now is not the time to take your eye off the ball. If you think 2021 was difficult to be an investor, 2022 could be even harder. However, by making these simple moves–taking losses, reducing bonds, and investing more in equities, you can look ahead knowing you are well prepared for whatever surprises 2022 may throw at us.
Happy New Year!