U.S. Investing in Review (December 2021)

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In 2020, our investment committee decided to add two new sectors to our U.S. Stock asset class allocations. We added the sector of Consumer Staples and the subsector of Biotechnology. We came to this decision after generating several hundred efficient frontier graphs of various United States classifications, industries, and sectors over a variety of time periods.

As we say in our article on the topic, we anticipated Consumer Staples to have a lower expected return but a larger risk-adjusted return and we expected Biotechnology to have very volatile returns with lower correlations to the other sectors. Both of those things happened in 2021.

Biotechnology has shown a very low correlation to Technology and Healthcare (under 0.6) and an even lower correlation to Consumer Staples (under 0.3). This low correlation means that it has the potential for a high rebalancing bonus. It also means it has the potential to perform very differently from the other three sectors, as it did this past year.

After having won the fourth quarter of 2020, Biotechnology was down each quarter of 2021.

Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020 Q3 2020
U.S. Biotechnology -10.94% -7.16% -0.18% -3.62% 26.49% -0.39%
U.S. Consumer Staples 12.24% -1.24% 2.98% 3.03% 7.43% 9.80%
U.S. Healthcare 8.13% 0.37% 8.34% 2.53% 10.11% 6.23%
U.S. Technology 14.39% 0.85% 11.40% 1.51% 13.82% 12.01%


While it is unfortunate, these returns are within normal market movements for the sector.

Diversification dampens both the highs and the lows. You always have an investment to complain about and an investment that is your darling. If you cut the investment you are upset with out of your portfolio, then you will no longer have its diversification benefits and may be out of luck when your darling goes down.

Because of Biotechnology, our static allocation underperformed our benchmark by -1.23% this past year.

In this analysis, I have used the actual products we are investing in rebalanced monthly to our static asset allocation targets with returns ending December 31, 2021. This analysis does not reflect our dynamic tilt, which we implement in client portfolios.

For a benchmark, I have used Vanguard Total Stock Market ETF (VTI), which tries to capture a cap-weight of the entire investable U.S. equity market by tracking the performance of the CRSP U.S. Total Market Index.

Ticker 3-Month 6-Month 9-Month 1-Year
Vanguard Total Stock Market ETF (Market Return) VTI 9.11% 9.08% 17.95% 25.67%
Rebalanced U.S. Stock Strategy 9.60% 9.14% 16.95% 24.44%
U.S. Biotechnology XBI -10.94% -17.31% -17.46% -20.45%
U.S. Consumer Staples VDC 12.24% 10.85% 14.15% 17.61%
U.S. Healthcare VHT 8.13% 8.53% 17.58% 20.56%
U.S. Technology VGT 14.39% 15.36% 28.51% 30.45%
U.S. Mid Cap Value VOE 8.30% 8.05% 13.11% 28.76%
U.S. Large Cap VOO 11.09% 11.70% 21.07% 28.78%
U.S. Small Cap Value VBR 6.37% 4.07% 9.54% 28.06%


Rebalancing paid off over this time period. For 1-Year returns, the static rebalanced U.S. Stock Strategy had a +0.81% advantage over a buy-and-hold.

As always, our Investment Committee will continue to monitor our portfolio targets and make adjustments when we believe we have the data to justify the changes.

Photo by Arnaud on Unsplash. Returns data gathered from Morningstar Advisor Workstation.

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.