Stock Market Investors’ Key Lessons From 2021

Apart from the solid gains, the stock market awarded some great lessons for investors this year.

| More on:
Make a choice, path to success, sign

Image source: Getty Images

2021 has indeed been a banner year for equity markets, marking an unstoppable recovery from the pandemic lows and laying a solid ground for 2022. Canadian markets added 20%, while the S&P 500 surged a notably 30% in 2021. The top-performing energy sector also bounced back with an 80% gain this year, creating massive wealth after digging a deep hole in investors’ pockets in the last four to five years.

Apart from the solid gains, the stock market awarded some great lessons for investors this year. Here are some of them.

Cope with behavioural biases

The year 2021 began with the fears of market crash amid dominating coronavirus variants. Naysayers were busy mongering fear almost throughout the year. An obvious reaction would be to panic and get out of the markets. However, those who effectively ignored the market crash rhetoric and remained invested won.

Equity markets function in cycles. The pandemic crash in March 2020 taught us the same thing. COVID-19 pulled stocks down by approximately 35% in just a few weeks. But was it the end of the world? No!

Discerned investors even managed to buy quality names on dips and increased their holdings. So, it’s even more important to deal with our behavioural biases while investing. Don’t let fear and greed dominate your investing decisions.

Keep inflation in mind

Rising inflation means cash will lose value even faster in the future. It makes great sense to invest your surplus cash in quality stocks for the long term. Indeed, some stocks will underperform with inflation trending higher but, sectors like energy perform better in an inflationary environment. So, instead of earning minimal returns with low-risk investment options, it is prudent to invest in stocks.

Diversification goes a long way

Diversification across asset classes, within sectors and with aggressive-defensive stocks should go a long way. Defensive stocks like Fortis or BCE outperformed during the crash last year. But as markets readied to take higher risks, defensives lost their sheen, and risky growth stocks significantly outperformed. So, diversify based on your risk appetite.

Even if one stock or sector underperforms, the other one in your portfolio should compensate for the underperformance. That is why, even if you are an aggressive investor, it makes sense to have some exposure to defensives.

Go for index funds

But not every investor has the acumen to pick stocks that could outperform in the long term. Warren Buffett suggests index funds for such investors. He is a long proponent of index funds, and Berkshire Hathaway has invested in some of those.

An index fund is a basket of stocks that give investors broad market representation. They are low risk and offer diversification.

If you are looking to bet on Canadian markets at large, consider iShares S&P/TSX 60 Index ETF (TSX:XIU).  The fund’s top components include Royal Bank of CanadaShopify, and Toronto-Dominion Bank, which collectively form 21% of the fund. XIU has returned 25% so far this year.

Investing in stocks via index funds is a smart move. Investors can generate decent returns without the hassle and without losing peace of mind. So, if you want to become a better investor in 2022, consider index funds.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns and recommends Shopify. The Motley Fool recommends Berkshire Hathaway (B shares) and FORTIS INC. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

More on Stocks for Beginners

cloud computing
Tech Stocks

Best Stock to Buy Right Now: Manulife vs CIBC

Want the best stocks? These two are certainly the best options. But which is the better buy?

Read more »

construction workers talk on the job site
Energy Stocks

Best Stock to Buy Right Now: Baytex vs Suncor?

Suncor and Baytex stocks both look like solid companies offering growth and dividends. But which is the better buy?

Read more »

profit rises over time
Top TSX Stocks

3 Reasons to Buy Enbridge Like There’s No Tomorrow

Have you considered buying Enbridge (TSX:ENB)? Here are 3 reasons to buy Enbridge today for lasting growth and income.

Read more »

An investor uses a tablet
Stocks for Beginners

If I Could Only Buy 2 Stocks in the Last Half of 2024, I’d Pick These

I’m looking to buy two stocks over the next month. Here’s a look at my picks and why you should…

Read more »

dividends grow over time
Stocks for Beginners

The Smartest Growth Stock to Buy With $2,000 Right Now

Do you have $2,000 to invest for the long term? These three TSX stocks have and will continue to deliver…

Read more »

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Is OpenText Stock a Buy, Sell, or Hold for 2025?

OpenText stock has fallen in the last few years, but that could mean this top tech stock remains an undervalued…

Read more »

man touches brain to show a good idea
Dividend Stocks

3 No-Brainer REIT Stocks to Buy Right Now for Less Than $200

REITs have long been touted as some of the best dividend stocks out there if you want recurring, strong income.…

Read more »

grow money, wealth build
Dividend Stocks

3 Top High-Yield Stocks to Buy in November

If you want passive income, high yield dividend stocks are the clear choice. These are the best, and safest, out…

Read more »