What We Already Know About Investing in 2021 – The Wall Street Journal

So you aren’t going to hear much about REITs or energy MLPs anytime soon; real-estate investment trusts were off 8% in 2020, and master limited partnerships lost more than 30%.

Instead, you’ll hear a lot about what was hot.

On social media, the first few weeks of the year will be full of bluster and braggadocio, with everyone who owned bitcoin or
Tesla Inc.
in 2020 boasting about how much money they made.

Those who were up the most always brag the loudest.

So it was in early 2000, after technology stocks gained more than 80% the year before. And so it is now, with venture capitalists and speculators boasting about the megabucks they’ve been making on tech stocks and cryptocurrencies.

On stock exchanges, SPACs will continue to be hyped hard and fast. Special-purpose acquisition companies, or SPACs, are corporate husks formed to pursue deals. After such a “shell company” finds a merger target, the acquired firm takes the SPAC’s stock-exchange listing, enabling it to sell shares to the public.

A few recent SPACs have done well, and they are a quick and convenient way for companies to raise capital. But their long-run record is riddled with losses, fat fees and chronic conflicts of interest.

Brokers and investment managers will be pushing:

• high-priced growth stocks and venture-capital funds, which generated hot returns last year;

• gold and bitcoin, accompanied by inflammatory rhetoric about looming hyperinflation;

• solar, wind and other “green” energy stocks and funds, up an average of more than 180% last year;

• options trading, which is often a slaughterhouse for individual investors but is a burgeoning profit center for brokerage firms;

• extended-market funds, which gained more than 30% in 2020, thanks largely to Tesla’s 743% return (however, now that Tesla has migrated to the S&P 500, these funds no longer can own it);

• China, whose stock market was up about 30% last year, and whose economy looks likely to keep bouncing back faster than those of other major countries;

• themselves, now that a new rule from the Securities and Exchange Commission permits investment advisers to advertise and promote their services more aggressively—including with paid testimonials from bloggers, clients and celebrities.

Extreme performance can last for a while, but it can’t persist indefinitely. If Tesla stock were to keep going up at the same rate as it did in 2020, by the end of this year it would have a market value of roughly $6 trillion. By year-end 2022, it would be worth nearly $51 trillion.

Not even the wildest bulls expect that, of course. But it’s a good reminder that, as

Warren Buffett
has said, “Geometric progressions eventually forge their own anchors.”

It takes determination to resist the easy temptation of chasing whatever has been hot, especially after a year in which 150 stocks at least tripled in market value—far more than the total for small, medium and large stocks combined in any year over the past decade, according to GMO, an investment-management firm in Boston.

If you’re tempted to play catch-up out of fear of missing out, at least limit the amount you put at risk. If you put, say, a maximum of 1% of your money into a speculation like bitcoin, a sudden decline can’t wipe you out.

The key to such a “mad money” account, as the investment analyst Benjamin Graham warned decades ago, is discipline: “Never add more money to this account just because the market has gone up and profits are rolling in…Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.”

Don’t rely on willpower alone to stick to such a plan. Sign a contract with yourself, witnessed by friends and family, not to exceed your limit in any mad-money account. You can also set dates in advance when you must automatically rebalance, or sell some of your winners, to keep speculative bets from dominating your portfolio.

If you don’t think you can stay that course, then I suggest declaring, up front, that you have no interest in chasing whatever has been hot. When anyone—in person, online or through an app on your phone—tries to push you into chasing an asset that had double-digit (or triple-digit!) returns last year, try answering this way: “Instead of that, what can you offer me that lost money last year?”

That silences the hype. That opens your mind to the kinds of neglected opportunities that often do best when last year’s market darlings fall from grace. And that keeps you from expecting the coming year to repeat the past year. They seldom do.

Write to Jason Zweig at intelligentinvestor@wsj.com