2021 In The Markets: The Good, The Bad, and The Ugly

Another year in the books and time to talk about what happened in 2021.  I’ve decided to categorize events this year as the good, the bad, and the ugly.  Like most years, we had some of all three. Let’s start out on a positive note, shall we?  

The Good

Diversified Stock Portfolios

2021 was the best year for a diversified stock portfolio since 2013.  The +26.9% return on the Dimensional Equity Balanced Strategy—a mix of US, international, and emerging markets stocks, including large/small and growth/value asset classes—was its 2nd best return in the last decade, bested only (and barely) by the +27.9% gain in 2013.  The Balanced Strategy’s gain in 2021 was almost 15% higher than its 10-year average of +12.3% per year.

US Stocks

Where did the strong returns come from? US stocks, more than anything else.  Returns on most US core stock asset classes were strong in 2021.  The S&P 500 (DFA US Large Company Portfolio) continued its run of strong returns in recent years—the S&P 500 is now +16.5% per year over the last decade, a much higher return than its historical average or than we should expect going forward.

For the first time in a few years, however, small-cap and value stock returns were much higher than large cap growth stocks.  While the DFA US Large Value fund trailed the S&P 500 slightly, the DFA US Micro Cap and US Small Value funds had much higher returns, and the DFA Real Estate Securities fund (REITs) earned over 40%.  

Non-US Small Cap and Value Stocks

International and emerging markets stocks didn’t do as well as the US market in 2021, and in the case of emerging markets large-cap, didn’t do very well at all, but the results are still worth noting because the outperformance for small cap and value stocks was significant.  International and emerging markets value stocks did much better than their “market” counterparts—the DFA International Value fund outperformed the DFA Large Cap International fund by almost 6%, and the DFA Emerging Markets Value fund outpaced the DFA Emerging Markets fund (large cap) by almost 10%.  The small-cap premium was positive in international stocks, as the DFA International Small Company fund outperformed the DFA Large Cap International fund by 1.5%, but where size really stood out was in emerging markets–the DFA Emerging Markets Small Cap fund outperformed the large-cap DFA Emerging Markets fund by 10%.

Clearly, it was a good year to be a stock investor in 2021, and a great year—as we expect—to be diversified into small cap and value stocks.  During a year where where inflation exceeded 5% for the first time in several decades, investors were reminded of the strong inflation-fighting benefits of being a stock “owner” and not, as we shall soon see, a bond “loaner.”

The Bad


Stocks and bonds often move opposite one another, and 2021 was no different. In a year where stock returns, especially in the US, were above average, we might not expect to also see good returns from bonds.  In fact, returns on bonds across the board were negative, besides inflation-protected securities (TIPS).  As expected, when interest rates rise and bond prices temporarily fall, longer-term bonds lose more (or gain less) than shorter-term bonds.  The ultra-short DFA One-Year Fixed Income fund was basically flat, and the short-term, five-year-or-less maturity DFA Five-Year Global fund only shed 1%, while intermediate-term bonds lost 2% to 3% and long-term bonds lost over 5%.

Basic Index Funds

While 2021 was a good year for stocks and small cap and value shares in particular, it was not as good a year if you invested in these areas with basic index funds.  In almost every single category, the indexes from Russell and MSCI, favored by many exchange-traded funds (ETFs) and Vanguard, performed far worse than the structured asset class mutual funds from DFA.  In a year where stocks were volatile and shares were moving in and out of asset classes within the year, DFA’s daily approach to portfolio management served it well (indexes are only updated once or twice a year), as did DFA’s much greater focus on the lowest-priced value and smallest small cap stocks.

First, we’ll look at US stocks.  The Russell 1000 Value Index had a good absolute return, but it was almost 3% lower than the DFA US Large Value fund.  The Russell 2000 Small Cap Index also had a good return—+14.8%—but that was 15% behind the DFA US Small Cap fund and over 18% behind the DFA US Micro Cap fund.  The Russell 2000 Small Cap Value Index had a very good return too, but it was over 10% lower than the DFA US Small Value fund.  Only the Dow Jones REIT Index managed meaningfully higher returns than the DFA Real Estate Securities fund, after several years of significant underperformance, but both still had gains over 40%.


Next, international indexes.  The table below reports that the MSCI World ex-US Value, Small Cap, and Small Value Indexes underperformed their corresponding DFA fund by -5%, -3%, and -2.5% in 2021.  In emerging markets, the MSCI Emerging Markets Index actually lost -2.5% and underperformed the DFA Emerging Markets Portfolio by 5%, the MSCI Emerging Markets Value Index trailed the DFA Emerging Markets Value Portfolio by 8.4%.  Only the MSCI Emerging Markets Small Cap Index outperformed the DFA Emerging Markets Small Cap fund.

Last year illustrates the risks of having too much of your portfolio in safer but lower-returning bonds—you could miss out on a big gain in stocks that could really help propel your long-term savings plan forward.  But it also shows that choosing the right type of stock fund to invest in matters a great deal too.  Many investors take the easy way out, simply opting for the lowest cost fund in the asset class they wish to own.  But there’s a lot more to investing than expenses.  The basic indexes from Russell and MSCI have NO COSTS, but still they trailed the expertly managed DFA asset class mutual funds by a wide margin in almost every category—a result we would expect in a year where small-cap and value stocks had superior returns.

The Ugly


We have to start with gold.  It was a bad year for the shiny yellow rock.  Gold declined -3.6% for the year, and has now gained only +1.5%/yr over the last decade, below the rate of trend line inflation it is supposed to “hedge.”

But wait, you say, gold’s decline is no worse than the loss we saw on bonds last year, why does it belong in the “ugly” category?  First, as I mentioned, we would have expected gold to perform better last year, as inflation rose to over 5%.  Many investors have been sitting on gold for years for just this reason, and gold failed to come through when it was needed.  Another reason is because you can’t look at gold in isolation, you have to view it relative to stocks.  Many investors in the last year or two have sold stocks to buy gold because they were absolutely convinced all the “money printing” by the Federal Reserve was going to push inflation higher and the dollar lower, causing stock prices to plumet and gold prices to soar.  You don’t see those Leer Capital Gold advertisements on cable news every 15 minutes for no reason!  Ultimately, gold underperformed the stocks many investors were selling by 30% in 2021; a disastrous result and worthy of my “ugly” category.

Growth Stocks

Next in my ugly category? US Small Cap Growth stocks and Emerging Markets Growth stocks.  On the surface, the +2.8% gain from the Russell 2000 Small Cap Growth Index might not seem to warrant an ugly award.  But consider that this return is almost 40% lower than the returns that were possible in small-cap value stocks (DFA)!  In fact, small cap growth had surprisingly outperformed small cap value for the last few years and more than one investor decided that they should switch from value to growth to capture more of the recent strong returns.  What more can you say than OUCH?

I also included Emerging Markets Growth on this list because it was the worst return I could find across all global stock asset classes, and compared to over a 12% gain on the DFA Emerging Markets Value Portfolio, we see a 20% difference last year in emerging markets from owning the wrong side of the market—growth instead of value.

ARK “Investors”

Finally, my ugliest of ugly awards in 2021 goes to the exchange-traded-fund ARK Innovation—ARKK.  If you haven’t heard of this ETF, it was all the rage in 2020; it is loaded up on all of the new-era technology companies (anyone remember Munder Net-Net?) and attracted tens of billions of dollars after it achieved extraordinary returns of over +150% in 2020.  Unfortunately, most of the fund’s assets came in late in 2020–in November and December—and didn’t see any of the big run-up, but was around for all of the big meltdown.  In fact, in an article written last month on Morningstar, the fund evaluation firm calculated that investors in the ETF had underperformed the actual fund, due to buying and selling at the wrong time, by approximately -25% per year over the last three years!  Now that’s ugly.  You’ve often heard me deride the costs of performance chasing, the ARK experience is prime example of how costly this urge can be.

So there you have it–my good, bad, and ugly for 2021. Hopefully, you found some insights that will help you to be a better investor in the years to come.  May you have a healthy and prosperous year in 2022.

I’ll be meeting with Servo clients in January and February to review their portfolios and plans, but if you’re not a Servo client but would like to discuss your current portfolio and/or retirement plan, don’t hesitate to book a short 30-minute appointment with me here.  If you have any topics you would like me to cover in upcoming articles, drop me a line at eric@servowealth.com.


Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.