Best Investments for Your Portfolio in 2022

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As the calendar turns over into January 2022, it’s a great time for all investors to review their portfolios and pick up some investments that might do well in the new year.

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Trends that were beginning to kick into place at the end of December 2021 are likely to have some legs in the new year, so looking at the performance of various investments over the past few weeks may be a good place to start. Examining the macroeconomic environment can be another clue as to what might work in 2022.

Consult with your financial advisor to see which of these might be a good match for your own personal risk tolerance and investment objectives. Here’s a list of some investments that have the potential to outperform in 2022, based on a number of factors.

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December Losers

One of the most regular phenomena that investors can profit from is the regular December selling of stocks that have lost value over the year. A combination of factors make these December selloffs a common occurrence.

First, investors often use December as a time to take tax losses to offset any gains they have realized over the course of the year. This tends to drive down losing shares even further.

Second, portfolio managers don’t like to keep losing stocks in their portfolios at the end of the year because they will be listed on year-end reports that go out to investors. No manager wants to be in the position of having to explain why they bought — and held on to — losing stocks, so they tend to offload these positions before the end of the year. 

Combined, these two effects tend to drive down losing shares even more than they may deserve, offering an opportunity for investors to pick them up before the selling pressure alleviates in January. Bear in mind that you’ll still have to do your own research to pick long-term winners out of the wreckage; simply picking up every stock that is down on the year won’t likely lead to successful long-term results.

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Real Estate

Real estate gave stocks a run for their money in 2021, up nearly 20% in the third quarter on a year-over-year basis.

Although real estate might not have quite as good of a year in 2022, the factors that have been driving these massive price gains remain largely in place. Although mortgage rates have been slowly ticking up over the past few weeks, the average 30-year loan still comes in at about 3.25%, with some lenders offering even lower rates.

Demand for homes still far outstrips supply, there’s a lot of cash in the economy between expanding growth and stimulus payouts, and rising inflation may keep prices rising.

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I-bonds are issued by the U.S. Treasury and carry the full faith and credit of the U.S. government, making them among the safest bonds available.

Unlike traditional savings bonds, I-bonds automatically adjust their interest rates in response to changing inflation rates. In other words, if inflation runs rampant, the interest you earn on your I-bond will increase dramatically, protecting you from a loss in purchasing power.

Interest on I-bonds is also state and local tax-exempt, as with all U.S. Treasury securities. I-bonds carry maturity dates of 30 years, but you can’t keep all your interest unless you hold the bond for at least five years from the date of purchase. The inflation rate on the bond is set every six months, and the maximum amount you can purchase is $10,000.

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Adjustable Rate ETFs

In what seems likely to be a rising interest rate environment in 2022, adjustable-rate investments may be a good option.

Adjustable-rate bonds have floating rates that automatically change based on current interest rates. For example, if the Fed raises short-term rates from 0% to 0.50%, a short-term adjustable bond will see its rate automatically bump up by about the same amount. Investors in these types of securities actually look forward to rate increases by the Fed, as it raises the amount of income they earn.

The best way for most investors to access this market is via a low-cost mutual fund or ETF, allowing professional managers to buy the appropriate bonds. 

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Dividend Aristocrats

In a year in which interest rates are expected to rise, investing in an income stream that consistently rises over the long run can be a good bet. So-called “dividend aristocrats” are stocks that have paid a dividend and also raised it annually for at least 25 years in a row.

There are also some other qualifications, such as having at least $3 billion in market cap and membership in the S&P 500 index.

The bottom line is that the dividend aristocrats already have proven themselves for decades through a multitude of economic cycles and are likely to be around for the long haul. Along the way, you’ll be earning an increasing stream of dividends, helping to offset the rising costs of inflation and interest rates. 

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Value Stocks

Value stocks are nearly the polar opposite of the “go-go” growth stocks that seem to dominate the financial headlines.

While companies such as Nvidia and Tesla are extremely popular with investors, that popularity comes with a price. All of those names trade at high price-earnings multiples, and their share prices tend to be quite volatile.

Value stocks, on the other hand, come from less flashy industries such as banking and utilities, and a good portion of their return comes from dividends rather than growth. Over very long time frames, value stocks actually have outperformed growth stocks, although that can be hard to believe for newer investors who have seen a decade of incredible performance from growth stocks.

In 2021, however, value stocks started making some headway against growth stocks, and some analysts feel 2022 could be a year when value is preferred over growth. Rising interest rates and inflation tend to devalue growth stock multiples, so value might have its day in the sun if those trends continue.

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Banks generally find themselves in the “value stock” category and, combined with a potential rotation from growth stocks to value stocks in 2022, other economic fundamentals support an investment in the banks as well.

For starters, it seems as if 2022 finally will be the year when the Fed actually begins raising interest rates again. This helps banks improve their profit margins, as they can lend out money at higher long-term rates while paying low short-term rates to savers.

As the economy is still recovering robustly from widespread pandemic shutdowns, increased business activity should also benefit the banks. Many investors jumped into banks in 2021, anticipating these changes, but the economic trends should support additional gains in 2022.

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Dogs of the Dow

The Dogs of the Dow is a strategy in which investors buy the top 10-yielding stocks in the Dow Jones Industrial Average as of the start of the year.

Typically, these stocks have underperformed others in the index, hence their increased dividend yields, which makes them all natural bounce-back candidates.

But heading into 2022, the Dogs may have some additional support thanks to the economic environment. Investors seem to be devaluing high-flying growth stocks due to the potential for rising inflation and interest rates. These factors can favor the defensive aspects of the high-dividend Dogs of the Dow, which are all value stocks in more defensive industries.

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Healthcare Stocks

Healthcare stocks come in many shapes and sizes, but they are generally considered defensive. Prescription drugs, pain relievers and doctor visits are expenses that most consumers won’t cut from their budget unless things are incredibly bleak, meaning cash flow for these companies is relatively predictable.

Pharmaceutical giant Merck also happens to be one of the Dogs of the Dow for 2022, making it a high-yielder in a defensive industry just when those types of characteristics seem to be coming back into favor. 

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Consumer Stocks

Consumer stocks have long been considered defensive due to a number of factors. First, even in hard economic times, Americans have to buy basic goods and services, from toothpaste and groceries to toilet paper and clothing.

Second, the American consumer likes to spend, in nearly any environment. Although savings rates went up during the depths of the pandemic, consumer spending picked up rapidly in 2021, and the most recent holiday shopping season was the best on record.

Thanks to a still-improving economy, higher wages and a proliferation of stimulus money, consumers likely will continue to spend throughout 2022, helping to support stocks such as Coca-Cola and Walmart. 

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