6 Ways 2021 Changed the Investing Game for Advisors

When looking forward to 2022, savvy financial advisors can take a lesson from 2021. This past year heralded many new investing realities, including a deceptive stock market, disappointing bond performance and inflation that appears to be anything but “transitory.”

Here’s how 2021 changed the investing game for advisors — and how they can take those lessons forward into 2022.

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The Stock Market Dodged a Bullet — But Don’t Count on That in 2022

The past year may have brought about one of the most deceptive stock markets in history.

The broad market had a great year … for about the first four months. But since May, it has been a case of the few carrying the many. In fact, just four stocks accounted for 70% of the S&P 500’s return in the past six months.

That’s not a narrow market. That’s an anorexic market. Combined with the recent meltdown of many so-called meme stocks and other popular items from 2020 and early 2021, the market seems less likely to rocket higher in 2022 than it did in early 2021.

This would be a bad time for advisors to just blow that off and turn on the old “just hang in there” charm. This coming year is uncertain, but this late-2021 swamping of so many market segments is likely to carry forward into the new year in some fashion. Like Harry Houdini, S&P 500 investors escaped this year.

Next year? Don’t count on it.

[Read: 5 Investing Challenges Advisors Should Anticipate in 2022.]

ETFs Gained Popularity In 2021, And That Will Continue Into 2022

The rise of exchange-traded funds, or ETFs, has essentially been the mirror image of the fall of mutual funds. In fact, so far, worldwide inflows into ETFs in 2021 topped $1 trillion, according to Morningstar data.

But despite moving onto the advisor’s turf like a loud new neighbor, it seems that advisors’ clients know very little about ETFs. A high portion of the assets ETFs are attracting are going into a small number of plain-vanilla-type funds.

That smells like an opportunity for advisors to use 2022 to up their ETF game and choose the most attractive pieces of the ETF puzzle to put together a customized vision for clients.

[Read: Protect the Point — How Advisors Can Deliver Tangible Value to Clients.]

Cryptocurrency Lured In Clients, and Advisors Will Need a Plan

Bitcoin, Ethereum, Dogecoin and their cryptocurrency brethren can plunge in price suddenly and forcefully, even on a weekend. Who knew? You probably did, but your clients may still be catching up.

In 2022, the opportunity is there to size up this market for clients and be the adult in the room. That market segment is not the first investment that was allegedly about changing the world. Separate the hype from whatever actual investment merits you see in crypto and blockchain, so they realize this is an area they can discuss with you.

Any asset can go up in price at any time. But there is risk attached to everything. For cryptocurrency, that risk of loss is severe.

Bonds Lost Their Vigor — Prepare for a Memorial Service in 2022

This past year had advisors rethinking the role of bonds in their clients’ portfolios. For 2022, expect much of the same.

Bond investing is not in the process of being more challenging to advisors and their clients. Instead, bonds’ role as an effective, reliable, long-term complement to your stock portfolio may be fast becoming outdated.

The 10-year U.S. Treasury bond has spent nearly all of the past decade below a 3% yield, and inflation is kicking up. That means advisors may need to take a hacksaw to 60-40 portfolios. Specifically, they’ll need to rethink the 40% segment.

Just shifting 10% of that slice into equities or alternatives won’t solve the problem. Use tactical, hedging and liquidity strategies, plus the flexibility of the stock market and ETFs, to your advantage. If you don’t, you risk having someone else tell your client how to do that.

For advisors, 2021 was a grace period of sorts because many clients have not noticed that bond returns are less than what they pay you.

Once the Nasdaq and S&P 500 move closer to earth than they have been since March 2020, clients may start to notice quickly. Beat them to that conversation, or you risk being on the defensive about how to play defense in their portfolio in 2022.

Robo Advising Gained Popularity, but Automation Alone Won’t Cut It in 2022

Throughout 2021, many firms have made the move to provide more automated client onboarding, model selection and allocation adjustments.

That’s the good news. Now, the bad news: That may reduce your perceived value in their eyes.

Robo portfolio management is a great technological innovation. However, if the portfolio that results is just a robo version of the same vanilla investment approach firms have skated through in the twin bull market eras for stocks and bonds, that’s a red flag for 2022.

Instead, strive to access a combination of flexible, contemporary portfolio management techniques, but delivered with all the modern convenience of robo-advisor technology.

Inflation Concerns Ramped Up in 2021 — And They’re Here to Stay

U.S. Federal Reserve Chairman Jerome Powell is not the only one thinking that calling inflation “transitory” was a bit optimistic.

Financial advising clients are worrying about it, too. They’ve seen they seen the evidence when eating, driving or purchasing anything that requires raw materials.

Inflation is likely to be elevated through 2022. That doesn’t have to bust client portfolios. Advisors can seek ways to exploit it. But more important, advisors can learn the history of higher prices, what is causing them now and why the hype might just be overstated.

As with everything else in investing in 2022, finding a balance between reward potential and the risk of major loss is paramount.

That’s easier to do when you have an established and agreed-upon game plan with clients. Because transitory might mean “not forever,” but it could also be like when your kids live at home after college, but end up staying much longer than you expected.

That kind of transitory can take a good plan and throw it off-kilter. Be sure to address the inflation equivalent of that in your financial and portfolio planning, then take a deep breath and enjoy 2022.

More from U.S. News

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How 2022 Tax Code Changes May Affect Financial Advisors’ Clients

6 Ways 2021 Changed the Investing Game for Advisors originally appeared on usnews.com

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