Here we are again, at the start of a new year. And I have a suggestion for those New Year’s resolutions you’ve probably already made: Don’t make any!
Instead, focus on making New Year’s commitments. First and foremost, a commitment to start some new investments, and change direction on some others.
2020 was a volatile year in both the economy and the financial markets. 2021 could prove to be more of the same. While you might not make any radical investment changes in the new year, the flipping of the calendar is a good time to make adjustments in your current portfolio, and even to take on some new challenges that may not seem like investments in the traditional sense. But trust me, they are.
Here is my list of the seven best investments to make in 2021:
1. Build Your Cash Reserves
Stocks are still the way to go in 2021. But don’t expect the market to give a repeat performance of 2020. Sure, the S&P 500 index was up more than 14% by Christmas. And that comes on the heels of a 29% gain in 2019. But both numbers are well above the historical average annual return of about 10% per year.
That doesn’t necessarily mean the market will take a dive in 2021. But it may be time for an adjustment in expectations.
Since there is no true way to counterbalance losses in stocks with other assets, cash is the default choice.
Not only does it maintain its value even when the financial markets are in turmoil, but also provides the capital to buy up stocks at what may prove to be bargain prices. You may want to do that after a downturn in the general market, or to take advantage of investing in specific market sectors.
It’s true that it’s hard to earn a decent return on interest-bearing investments, like certificates of deposit or U.S. Treasury securities. But there are some banks that are paying interest rates at the higher end of the scale. No, you won’t grow your money. But cash serves a much more important purpose in this kind of investment environment: it provides liquidity.
With stocks ending 2020 in record territory, the best investment strategy may prove to be building up cash reserves. It won’t provide big returns, but will leave you better prepared for whatever will be coming next.
2. Stocks – Still the Way to Go in 2021
No one can say for certain which way the stock market will head in 2021, but investing in stocks has always been about playing the averages. And the averages strongly favor maintaining a large position in stocks.
That said, you may want to become more selective. The major indices, like the S&P 500 and the NASDAQ 100 have largely powered forward on the strength of tech stocks. If that sector begins to head south, it can drag the major indices down with it.
This is another reason to build your cash reserves. If you’re heavily invested in the S&P 500, a large cash position will give you an opportunity to invest in emerging sectors if the general market declines.
Moving beyond Tech Stocks and the S&P 500
I’m certainly not calling that shift in 2021. But at the same time, tech stocks have a convincing track record of steady, spectacular gains over several years, reliably followed by equally impressive declines. 2021 may prove to be a year when investors will be scrambling for other sectors to favor.
Fortunately, there are plenty of options.
“Defense stocks under-performed in 2020 but have a 30+ year track record of new highs within 30 months,” advises Scott Sacknoff, President of SPADE Indexes. “A rebound in commercial aerospace and solid defense spending in 2021 is expected. I Expect ETFs like the Invesco Defense ETF (NYSE: PPA) to outperform the market.”
Given the potential for both economic growth and rising inflation in the coming year, certain commodity sectors may become investment-worthy.
“Certain commodities such as industrial metals and agricultural products appear to have a good reward-risk tradeoff in 2021,” notes Forbes Senior Contributor, Rob Isbitts. “That implies inflation pressure, as the global economy kicks back into gear and input prices rise. I also see 2021 as a crucial year for pre-retirees, after 2020’s ‘warning shot’. Those approaching retirement need to take account for how much they have accumulated and make it an absolute priority NOT to give a lot of that back to this inanimate object called ‘the stock market’.”
Still another stock sector to consider is biotech, which represents the cutting edge of the healthcare industry. With the effectiveness of COVID-19 vaccines still in the “too early to tell” stage, biotech may continue to be a strong sector in 2021 no matter what the general market is doing.
A simple way to play the sector is through the SPDR S&P Biotech ETF (XBI) XBI . The fund was up an incredible 40% through November 30, and about 30% for 2019.
3. Real Estate
Given the steady rise in residential real estate prices, as well as turbulence in the commercial real estate market, the sector does look like a mixed bag going into 2021. But that’s exactly why it may deserve a close look in the coming year.
I’m a big fan of real estate investment trusts (REITs), though the sector as a whole did poorly in 2020. Based on the FTSE Nareit U.S. Real Estate Index REITs have shed 7.25% through December 24. But that comes on the heels of a 28% gain in 2019.
Which way will real estate go in 2021? It’s anyone’s guess.
REITs looked like a solid bet after both big gains in 2019 and a strong start with the economy in 2020. But no one saw the coronavirus coming at that time, and it proved to be a game-changer.
Commercial real estate has been negatively impacted by a massive move toward remote basing of employees. Office buildings and many big-city downtown areas have seen sharp spikes in vacancy rates, while retail space has been hurt by the closure of tens of thousands of stores.
But the misfortunes of one year often create new investment opportunities in the next.
“The real estate market on both the commercial and residential side will more than likely fall off a proverbial cliff as forbearance programs come to an end and stimulus funding runs out in early to mid-2021,” warns Marc Snyderman, COO and co-founder of the Apolline Group, LLC. “For those with cash on hand and unleveraged balance sheets, there will be significant opportunities to buy up distressed and foreclosed properties.”
Still another reason to consider investing in real estate is as a counter-play to the stock market. Real estate often turns in a strong performance during stock market declines, as investors look for alternative equity investments. Since real estate returns have been comparable to the stock market over the past several decades, real estate serves as a natural alternative to stocks in the equity space.
4. Pay down or Pay Off Debt
Whether the economy turns up or tumbles down in 2021, the experience of 2020, should serve as a cautionary tale. Millions of workers lost their jobs, tens of thousands of people lost their businesses, and the stock market staged an impressive recovery after it’s late winter mini-crash.
The point is, life is unpredictable. At the beginning of 2020, the stock market was at record highs, housing prices were rising, and unemployment was at record lows. The general assumption at the beginning of the year was smooth sailing ahead.
If 2021 plays out to be as unpredictable as 2020 has been – and there’s even a possibility it will be more so – paying down or paying off debt will be one of the very best investments you can make. You can ill-afford to carry credit cards with 20% interest rates or even a low-interest home equity line of credit if your job or business reaches jeopardy status in 2021.
In addition, paying off a credit card with a 20% interest rate will be like locking in a 20% investment return for several years.
The paying off or paying down debt isn’t all about preparing for the worst either. It’s equally a matter of preparing for the best.
If you want to make any of the investments in this article, increase your retirement savings, or launch a side business, the less money you owe the easier each of those ventures will be.
Much like building up cash reserves, getting out of debt is a way of increasing your preparedness. That will work to your advantage whether you’re preparing for an oncoming storm or jumping into a new venture that will improve your future.
5. Launch or Accelerate Your Retirement Savings Plan
Technically speaking, a retirement plan isn’t an investment – at least not in-and-of itself. It would be better to say that it’s a platform to do your investing in.
You should take full advantage of that. Not only are contributions generally tax-deductible, but the investment income you earn in your account is tax-deferred. That can mean the difference between getting a 7% return on your investments – after tax – and 10%, tax-deferred.
The compounding difference between the two over 20 or 30 years is staggering.
For example, let’s say you can invest in stocks and REITs and earn an average annual return of 10%. If your combined federal and state income tax rate is 30%, the net return on your investments in a taxable account will be 7%.
If you invest $10,000 in a taxable account for 20 years, with an average annual after-tax rate of return of 7%, the account will grow to about $38,700.
But if the same $10,000 is invested in a tax-sheltered retirement plan, you’ll get the benefit of the full 10% average annual rate of return on your investments. After 20 years, your initial investment will grow to about $67,300. That means you’ll be nearly $30,000 richer just for housing your investments in the right account.
That’s what investing through a tax-sheltered retirement plan can do for your investments. And we haven’t even calculated the benefit of employer matching contributions on 401(k) and 403(b) plans.
Given that advantage, you should have all the motivation you need to either start a retirement plan or increase your contributions to the one you have in the coming year.
If you’re participating in an employer-sponsored retirement plan, you can contribute up to 100% of your earned income, up to $19,500 per year, or $26,000 if you’re 50 or older.
Make a commitment to get as close to the maximum contribution as you can in 2021. And if you haven’t started a retirement plan so far, make it happen in the coming year.
6. Make 2021 the Year You Begin Investing in Yourself
This is one of my favorite “investments”, even though most people probably don’t think of it that way. But investing in yourself is often the best long-term move you can make. It offers an opportunity to increase your earning power, which will have a major, positive impact on any other investment activity you participate in.
That may be more important to do in 2021 than it has been in decades. 2020 proved to be a difficult year for people in at least a dozen different occupations. Investing in yourself may be a way to add an important skill that will enable you to either keep the job you have or transition into another field.
“In my mind, the best investment is in yourself,” advises Tom Diem, CFP and ChFC at Diem Wealth Management. “2020 has been a struggle for many just to keep employed. Overcoming unemployment doesn’t have to involve entering into an extensive educational program. It’s better to think a little differently. Sure, the food and beverage, tourism, fitness, and health and beauty sectors have taken a hard hit this year. But despite lockdowns, the home improvement industry has shown gains in 2020. According to Macrotrends, Lowe’s Corporation has a year-to-date increase in sales of over 1% and a third quarter sales increase of over 28%. It may be a matter of shifting out of the occupations that are in decline and into those that are on the rise.”
Investing in yourself doesn’t necessarily have to be limited to improving your career prospects. You can also invest in other areas of your life, like improving your health, or learning how to be a better investor. Either will have the potential to improve your long-term financial situation, as well as the quality of your life.
“Most people go from month to month, year to year, only seeing “what happens” or “how things go” or “how the market performs” – but never invest the time, effort and financial resources to improve themselves,” suggests Frank Lopes, author of The 7-Minute Setup: How to Achieve your Business and Personal Goals Faster and Easier. “Some examples of this could be investing in a personal trainer to get themselves into shape. Or the investment of a nutritionist to set up meal plans, shopping lists, and menus to follow so someone can invest in their nutrition and better health. You can also hire a personal coach to set up a process for achieving other financial, spiritual, time management, relationship, and other short- and long-term goals.”
7. Invest in a Side Business
Much like investing in yourself, a side business isn’t typically thought of as an investment. But it is very much an investment, even though time and effort may be your actual investment, rather than money. And in a very real way, investing in a side business is the ultimate form of investing in yourself.
I’m personally a big fan of side hustles. That’s mostly because my current income portfolio includes a number of side hustles that have become regular contributors to my bottom line. Because of my experience, I’m keenly aware there are literally dozens of ways an ordinary person can make money for a side hustle.
It’s not as complicated as you may think, either. Most side businesses start with either a hobby or by converting what you do on your primary job to a second income source.
1. If you’re a teacher, you can provide specialized tutoring on the side.
2. If you’re bilingual, you can teach English as a second language.
3. As an accountant by day, you can build a side business providing income tax preparation to individuals, or bookkeeping services to small businesses.
4. If you have a strong social media presence, you may be able to parlay that into becoming a social media manager for multiple small businesses.
5. If there’s a topic you’re particularly strong in – like investing, auto mechanics, or traveling on a budget – you can create an e-book and sell it on the web.
These are just five examples of the types of side businesses you can start from right where you are now.
“I have a lifestyle business in which I travel the world and generate revenue in several ways,” reports Tina Dahmen, online course coach at Entrepreneur.com and owner of her own online course creation blog, TinaDahmen.com. “One of the ways is online courses. What I found with online courses, and selling them in particular, is that blogging helps to build authority in the space and it’s a necessity to be seen as an expert if you sell online courses. Online courses are a digital asset which anyone can create.”
I can’t say enough about the benefits of a side business. The most obvious is the ability to earn additional money that can be used to either pay off debt, or increase savings and investments. But a longer-term possibility – and one that happens more than you might think – is that your side business may one day turn into your primary occupation. If it’s work you truly enjoy, it’ll be a double win.
If you take the plunge into a side business, you’ll have plenty of company. According to the IRS, there are at least 41 million self-employed people in the US, most of whom run their businesses as side hustles. You can be one of them.
As we enter 2021, it should be obvious to everyone that change is a normal part of life. And though it doesn’t always, it sometimes affects your financial well-being. That can include your job, your business, and your investment portfolio.
Since panicking solves absolutely nothing, the best strategy is to have a plan of attack. That may not mean doing anything radical. But just implementing strategies that will increase your investment returns, decrease your losses, improve your ability to earn a living (or stay employed), and get better control over your cash flow, can lead to major improvements in your life going forward.
So, forget about those New Year’s resolutions, and zero-in on New Year’s commitments – making the kinds of investments that will improve both your finances and the quality of your life.