What a year: Taking a moment to reflect on market performance in 2021

In reviewing 2021, the number of negative headlines — from the spread and depth of COVID-19 to inflation to Fed policy to meme stock investing — would lead you to believe that the year was an example of highly volatile markets and poor performance.

In fact, performance was above historical averages.

In the infographic below, you can see some of the 2021 news headlines imposed on the annual performance of the S&P 500. So many of these headlines caused people to try and predict negative stock market performance that just didn’t materialize — yet did cause a lot of angst.

S&P 500® index total return and headlines in 2021

SP 500 index total return and headline in 2021Figure 1 source: ICI, FactSet, Avantis Investors. Data from January 1, 2021–December 31, 2021. Past performance is no guarantee of future results.

Dissecting performance

S&P 500: In 2021, the S&P 500 total return index returned 28.71%. Given capital market expectations, news shocks and long-term performance metrics, this was an extremely attractive result. In the long run, defined as a 15-year annualized return, the S&P earned 10.66%. If you shorten your investment horizon to 10 years, the S&P returned 16.55% on an annualized basis.

In either situation, the performance of 2021 is notable for the solid excess performance in a year with a series of negative events that many worried would impact market performance. In fact, the S&P 500 has shown unusually high performance for the past three years.

To note how unusual this level of return is, the S&P 500 most recently had slightly higher performance in 2019; however, before that, we only saw higher performance in 2013, 1997, 1995 and 1991. These high levels of return are neither common nor expected to persist.

Fixed income: Fixed income, as represented by the Bloomberg U.S. Aggregate Bond Index, lost slightly in 2021, posting a -1.54% return. The 15-year annualized return is 4.09%. Overall fixed income held up well given the changing monetary policy during the year.

Broad 60/40 benchmark: A balanced benchmark (here a broad 60% stocks and 40% bonds, non-tax-managed index) also posted attractive returns in 2021. The benchmark return for the year was 10.10%. This compares very favorably to the 15-year annualized 60/40 return of 6.83%. And it is still very favorable relative to the 10-year annualized return of 8.99%.

All in all, most investors in broadly diversified portfolios earned a rate of return in 2021 that was higher than the long-term historic average.

The S&P 500 is not the only benchmark

The robust performance of the S&P 500 has spawned all sorts of articles as to how funds, managers, esoteric investments and more cannot outperform it given this year’s returns. Hopefully no one is planning to invest in the S&P 500 at the expense of creating or maintaining a balanced portfolio (i.e., holding a variety of equity and fixed income asset classes at a risk level appropriate for you), which offers diversification benefits to protect each investor in the event of specific impact and shocks from upcoming events.

Fund benchmarks: The bigger issue when evaluating a fund is to properly identify a benchmark to measure it against so you can gain insight into the fund’s performance. The S&P 500 isn’t the be-all, end-all of performance measurement. You want to identify the benchmark that reflects the universe of your fund’s investment. It might be international stocks. It might be small stocks. It might be large growth stocks. You then set the benchmark for performance comparison against this universe. In this way you truly know how the manager performed within their investable universe, and you measure the manager consistently.

In 2021, with such strong performance by the S&P 500, there have even been articles about index-based funds underperforming the S&P 500 index. It’s true that it’s not easy for a fund to match the performance of the index, as the fund itself will bear all the costs of rebalancing to align with the index, to reinvest dividends in a timely manner and to meet contributions and withdrawals. But these benchmarks also need to be aligned with the universe of the investment opportunity.

Portfolio benchmarks: For your overall investment, you need to evaluate against a blended benchmark. Maybe you have a portfolio that is 60% equities and 40% bonds. It wouldn’t give you enough information to evaluate your performance merely against the S&P 500. You would also need to evaluate against a balanced benchmark to really understand whether performance is meeting your expectations.

What about 2022?

At this point, the market performance seems great. Your new overall portfolio valuation seems great. Now, what about the future? It’s human nature to weigh recent experiences more heavily in setting expectations about the future. However, we don’t expect to see this again in 2022.

In 2021, returns were above their historic averages, but they are not predictions of a new level of future returns. When we look at capital market expectations, returns are expected to be more moderate.

In 2021, the capital market expectation for the blended 60% stocks/40% bonds portfolio (non-tax-managed) was 5.45% over the long-term (10 years). In this balanced portfolio, the standard deviation of performance is measured at 11.45%. You can see that the annual model return for a 60/40 portfolio in 2021 of 10.10% was above this expectation.

Note that a long-term capital market expectation for the broad U.S. equity market (represented by the Russell 3000) was 6.6% for comparison.

It’s best to consider the long-term expected returns in planning your finances, rather than 2021’s extraordinary return level. A good return level one year doesn’t mean there is a benefit to suddenly switching your portfolio. (The exception is if something has changed in your life, causing your overall financial plan to change.) Such a change is costly to execute both in terms of transaction fees and tax obligations, and it doesn’t serve you well in growing long-term wealth.

A balanced portfolio filled with asset classes that diversify each other helps protect you from shocks in any given asset class by relying on a different asset class to perform differently during the same economic or news event.

In 2021, you may have worried about the impact on portfolio performance from the large number of news stories about an array of economic risks and dangers. In the end, those risks didn’t have that negative impact, and the market performed very well.

When you put in place a balanced and diversified portfolio that meets your financial goals, you may have to weather storms, but you also have the benefit of being invested in years such as this.

If you need assistance putting together a balanced portfolio, reach out Wipfli Financial. Our advisors can help you put together a portfolio based on your financial goals, risk tolerance and other important factors.


Taking a moment to reflect on market performance in 2021

Source of market performance data: Morningstar Direct.

Index/portfolio descriptions

All index-based performance results have been compiled by Wipfli Financial from sources deemed to be reliable and have not been independently verified. It is not possible to invest in an index. Index returns do not reflect the deduction of transaction fees, custodial charges or the deduction of investment advisory fees, the incurrence of which would have the effect of decreasing historical performance results. Past performance is not indicative of future returns.

The broad 60/40 benchmark is assumed to be rebalanced quarterly and is composed of the following underlying indices and weights: 36% Russell 3000 index, 24% MSCI ACWI ex-U.S. index, 40% Bloomberg Aggregate Bond index.

S&P 500: The index measures the performance of the large-cap segment of the market. The index is composed of 500 constituent companies.

Russell 3000: The index measures the performance of the largest 3,000 US companies representing approximately 98% of the investable U.S. equity market.

MSCI ACWI ex-U.S.: The index captures large and mid-cap representation across 22 of 23 developed markets (DM) countries (excluding the U.S.) and 26 emerging markets (EM) countries. With 2,411 constituents, the index covers approximately 85% of the global equity opportunity set outside the U.S.

Bloomberg Barclays U.S. Aggregate: The index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

Source of long-term capital market expectation data: Frontier Engineer.

To augment our base of financial- and investment-related information, and for the purposes of additional sophisticated analysis, Wipfli Financial has engaged Fiducient Advisors (“Fiducient”). Fiducient has developed Frontier Engineer software (“Frontier Engineer”), a mean-variance optimization and Monte Carlo modeling application, that helps determine optimal asset allocation strategies and illustrate the trade-off between investment volatility and expected return. All capital market data presented herein has been developed using Frontier Engineer. Additional information about the Fiducient and Frontier Engineer methodology is available upon request. Wipfli Financial and Fiducient Advisors are not affiliated entities.

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Janice Deringer


Janice L. Deringer is a member of Wipfli Financial's Investment Committee and a consultant who focuses on serving individual and corporate clients. She brings over 20 years of institutional investment management experience to her strong interest in educating women and individuals regarding financial decisions, realities and possibilities.

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What a year: Taking a moment to reflect on market performance in 2021

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