Summary

My favorite time of the year is finally here! I always look forward to cool weather, scary movies, Oktoberfest beers, and apple season.

While the run-up in the financial markets continued for much of the summer, the third quarter ended with an increase in volatility and with stocks finally pulling back from all-time highs. It was a good reminder that stocks don't always go up.

As I've written previously, September is often the worst-performing month for investors. Whether or not the September Effect is real is debatable, but this September certainly wasn't kind to investors.

I suspect volatility will continue as the world grapples with, among other things, unnecessary drama from our elected officials, COVID-19 and its variants, reluctance by (too) many to get vaccinated, ongoing supply chain woes, and employment/staffing hiccups.

Third Quarter 2021 Numbers

The average diversified U.S. stock fund, which is a better measure of how we invest than the S&P 500, declined about 1.0% during the third quarter of 2021. As I mentioned above, September was a rough month for investors, with the average U.S. stock fund dropping 4.0% during that month alone. When the first and second quarter returns are added to the third, the average diversified U.S. stock fund is up 14.5% as of September 30. Investors, perhaps concerned about continuing to invest at all-time highs, pushed only $9 billion into U.S. stock funds during the quarter.

International stocks were also down for the quarter: The average diversified international stock fund lost about 1.8%. As of September 30th international stocks are up 7.1%. Investors demonstrated more confidence in international stock funds by investing $59 billion in those funds during the quarter.

The average intermediate-term bond fund rose a whopping 0.01% during the third quarter. Overall, bond funds are still negative for the year, at just over 1.1%. Despite low/negative returns, investors plowed nearly $129 billion into bond funds over the three-month period.

Returns By Category

Need a magnifying glass to read this? No problem. Here's a link to a PDF of this chart.

The chart above provides a high-level view of how the asset categories performed for the years 2018 to 2020, January through September 2021, and year-to-date 2021.

I love this chart and always look forward to seeing the updated version. Two takeaways:

1. Notice any patterns? If you answered "yes", we need to talk because your brain operates on a different level than mine. It's nearly impossible to consistently predict which categories will perform best from year-to-year or month-to-month.

2. This chart is Exhibit A for why it's prudent to build diversified portfolios. Sadly, diversification means you're always having to say you're sorry because it's rare for every category to produce positive returns.

Fourth Quarter And Beyond

No one can predict what's in store for financial markets, but here are some things likely to affect investors in the coming months:

1. Interest rates. Fed officials have signaled they might raise interest rates in 2022. Investors shrugged when this announcement was made, but I won't be surprised if the market reacts negatively when rates are actually increased.

2. Supply chain woes. Looking for a new car? Good luck. Hoping to score a PlayStation 5? I assume I'll be able to buy one when the PlayStation 6 is announced. Consumers will probably continue to have a difficult time buying many products due to semiconductor shortages, staffing problems, and COVID-related closures.

3. Inflation. Is inflation truly transitory, or short-term, as the Fed and many economists would have us believe? We'll see. In the end, it might depend on your definition of short-term.

4. Regulation of cryptocurrencies. Will the U.S. of other governments move to regulate or ban cryptocurrencies? Or will there be a flood of new investment products and services. Time will tell, but I think an outright ban, at least in the U.S., is unrealistic because of the amount of money currently invested in the space.

Downtime

Here are some things that have my attention when I'm not working:

1. Listening:

   1. Podcasts: The two podcasts I look forward to every week are Animal Spirits and The Compound & Friends. Both shows cover a wide range of financial topics, such as the economy, investing, and taxes.

   2. Audiobooks: I'm currently listening to The Exponential Age: How Accelerating Technology is Transforming Business, Politics, and Society by Azeem Azhar, which has been interesting because I think humans have a difficult time understanding how exponential growth can affect things. I'm also re-listening to Snow Crash by Neal Stephenson. For a book published way back in 1992, it's amazing how much Stephenson got right about the internet, A.I. assistants, and the Metaverse.

2. Watching:

   1. Squid Game. I just started watching this Korean series on Netflix. So far, it's great. Not for the squeamish.

   2. Midnight Mass. This one's also on Netflix. Highly recommended for fans of scary movies or anything influenced by Stephen King.