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BLOG: 2021 – a year in review

Emma Lunn
Written By:
Emma Lunn

“Doubt isn’t a pleasant condition, but certainty is an absurd one.” 1 . And when it comes to investing, who can disagree with this phrase.

After all, markets move according to the dictates of an ever-mutating jumble of competing influences. They fall as well as rise, putting your capital at risk whenever you invest. It’s why we believe the road to investment success is paved with a balanced and diversified, low-cost investment strategy aligned with your goals.

For us, investing is not about putting your chips on black or red, or pinning your hopes on a few potential blockbuster stocks, or betting on this or that industrial sector or country. It is about recognising and respecting the risks that are naturally baked into investing and not letting these risks become your master.

To illustrate this, we have reviewed a few popular investment themes from the last year to understand how being diversified can help investors.

Diversification across assets

At the start of 2021, many investors were concerned about a potential bond market rout once economies emerged from lockdowns. In the main, because of nagging inflation worries that might spur central banks to raise short-term interest rates as post-pandemic recoveries took hold and, in turn, force up government bond yields (a yardstick for longer-term rates that move in exactly the opposite direction to bond prices).

With consumers and businesses eager to spend more and supply bottlenecks and higher energy prices pushing up inflation, the likelihood of interest rate rises to stem these pressures has grown, notwithstanding the renewed Covid-19 concerns. However, the bond sell-offs seen at the start of the year have not turned into the feared rout. Longer-dated bonds, which typically do worst of all in an inflationary environment, have in some cases even fared better than shorter maturities.

Despite the reflation fears, we continue to believe that bonds will show their worth as essential diversifiers in a broad multi-asset portfolio. We think the negative statistical relationship between shares and bonds that has been seen over the last 30 years, which can help to stabilise a portfolio during market downturns, will persist over the next 10 years2.

Diversification across geographies

China, with its zero-tolerance approach to Covid-19, was the first major economy to return to its pre-pandemic growth trajectory at the turn of last year. Much like other parts of the Asia-Pacific region, it suffered relatively fewer cases and mortalities too.

For sterling-based investors in China, though, 2021 has turned out to be significantly worse than might have been expected, with the country’s markets underperforming those in the US and Europe. This, in turn, has dragged on emerging market returns, given China’s outsized contribution to the segment.

Another case in point is the relatively unloved and undervalued UK market. With post-Brexit trading arrangements agreed with the European Union and the country moving quickly out of a second lockdown after a successful vaccination drive, things appeared to be looking up this year, not least for those companies worst affected by the pandemic and most reliant on domestic demand. However, the performance of the UK stock market so far this year, although positive, has not stood out greatly from other developed markets.

Even when you have strong convictions, it’s difficult to get the timing right. Our internal modelling indicates that shares in the UK are likely to perform better than in the rest of the word in sterling terms3 – but that’s on average and over the next 10 years, which means there could still be several bumps along the way.

In contrast, we consider US shares to be relatively overvalued. But we did last year too, and they have continued to power ever-higher in 2021 – so much so, that we consider them to be more overvalued now than at any time since the dot-com bubble. More reason to make sure you are globally diversified.

Diversification across styles

2021 was widely seen as the year when ‘value’ shares (relatively mature but overlooked companies) would outperform ‘growth’ stocks (fast-growing companies with relatively expensive shares) after several years of underperformance. And they did for a time, as stock market gains broadened out as part of a general reflation trade. However, growth companies, many of them technology firms, moved back into fashion over the course of the year, powering the S&P 500 to new record closing highs as recently as this month.

At Vanguard, we still think ‘value’ stocks, generally, are relatively undervalued4. But, again, timing when and how the performance gap will close is very hard to do, which is why it’s better to ensure you’re always fully diversified.

By investing broadly and keeping your discipline over the long term, you not only boost your chances of holding future winners but also of gradually (and automatically) leaving behind the losers from your portfolio. You also avoid asset-allocation mistakes and poor stock picks that could be detrimental to your wealth.

Whichever the year, we believe investors should aim to be balanced across different asset classes, using products which are low-cost and long-term in nature and diversified by holdings. This approach is more dependable than chasing individual investment themes.


1 Voltaire (1694-1778). Original French quote: “Le doute n’est pas une état bien agréable, mais l’assurance est un état ridicule”. Source: Complete Works of Voltaire, Volume 12, Part 1.

2 The correlation between shares and high-quality bonds is expected to remain negative, on average, over the next 10 years, based on median forecasts for 10-year nominal total returns in GBP for UK equities, global ex-UK equities, emerging market equities, UK bonds, global ex-UK bonds, UK government bonds, UK credit, UK cash, global credit (hedged) and emerging market sovereign bonds. These projections are also generated by the VCCM. Source: Vanguard economic and market outlook 2022, Vanguard Research, December 2021.

3 Our forecast is for UK shares to return between 4.6% and 6.6% over the next 10 years on an annualised basis. The outlook for global ex-UK equities in sterling terms is more muted, with an expected return between 2.8% and 4.8%. These projections are generated by the Vanguard Capital Markets Model® (VCCM), a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. They are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The model forecasts distributions of future returns for a wide array of broad asset classes and are derived from 10,000 simulations for each modelled asset class. Simulations are as at 30 September 2021. Results from the model may vary with each use and over time. Source: Vanguard economic and market outlook 2022, Vanguard Research, December 2021.

4 Source: Vanguard economic and market outlook 2022, Vanguard Research, December 2021.


Mark Fitzgerald is head of product specialism at Vanguard, Europe