Will the Stock Market Rise Next Year? 5 Predictions for 2021

By Dan Caplinger at Fool.com

If there’s one lesson that the past year has taught me, it’s that the more specific you are in trying to predict the future, the more likely you’ll be dead wrong. To my knowledge, no one had a clue that a global pandemic would become the most influential worldwide event in generations and drive so much of what happened in the investment world in 2020.

For instance, plenty of people came into this year predicting that the bull market in stocks would continue. As of this writing, a return of 13% for the S&P 500, 5% for the Dow, and 38% for the Nasdaq is quite consistent with many of those predictions. But nobody I saw said those returns would come after a huge bear market blitz.

On the other hand, others predicted the long bull market in stocks would end in 2020, and they were technically right, too, with huge declines of 30% or more as of March. Yet nobody I saw said that a big drop would be followed by a massive recovery the very same year.

So, let me get this out of the way right now: I have no idea whether the stock market will rise or fall in 2021. I think it’s more likely to go up. But I’m not counting on it. More importantly, what the market does in 2021 doesn’t really matter to my long-term personal financial plan.

5 Investing Predictions for the Coming Year

If you’re expecting bold predictions from me, I’m afraid you’re going to be disappointed. What I hope you’ll take away from these predictions, though, is an actionable list of things you can do with your investment strategy to be prepared for what 2021 will bring.

1. More People Will Invest Than Ever in 2021

Nothing spurs people to invest like a strong year for the stock market, and 2020 has given investors yet another reminder of how resilient the markets can be. It’s also never been easierto invest, with stock apps like Robinhood opening doors to a whole new generation of young investors and the rise of robo-advisors helping people with little time or inclination to pick individual stocks on their own.

We like to see more people investing, but the short-term trading approach that most new day traders use won’t work for most of them in the long run. The more people invest, the more valuable having a core investing philosophy and strategy will be. We think that’s good news for you and all of our Motley Fool members in 2021.

2. Most of Your Stock Portfolio Gains Will Come From a Few Big Winners

One of our most important core philosophies is that it’s essential to have a diversified portfolio of 15 or more stocks. That protects against the volatility that inevitably comes with investing in individual companies, but it’s also because inevitably, the vast majority of your performance will come from just a handful of your stock picks.

For instance, looking back at the nearly two dozen stock recommendations that Stock Advisor has made in 2020, I never would’ve guessed that Tesla (NASDAQ: TSLA) would be the one to sport an amazing return of more than 600% year to date. The automaker was already a big company compared to most of our recommendations. Those who chose to pass on Tesla missed a golden opportunity to boost their returns dramatically for 2020.

3. Stocks Will Remain a Better Bet Than Most Other Investment Assets

I’ve always been a more conservative investor than many of my peers here at the Fool. I also turned 50 this year, and that’s led me to think about alternatives to stocks for the “safer” portion of my investment portfolio.

However, as most of you know all too well, it’s a tough environment for most other traditional asset classes. Bonds have actually performed reasonably well in 2020 on a total return basis, but their gains have come largely from falling interest rates resulting from unprecedented central bank intervention following the initial COVID-19 outbreak. The actual interest you’ll get on bonds is still next to nonexistent. Similarly, interest on bank savings accounts and CDs has pretty much dried up.

The rise of more speculative investments like cryptocurrency shows just how much investors want to diversify beyond stocks. For now, though, stocks offer the best balance of risk and reward, and I don’t see that changing in 2021.

4. There Will Be Great Investment Opportunities

The huge recovery in stocks in the last nine months of 2020 has made the stock market the place to be for young up-and-coming companies with disruptive business models. The IPOs of Airbnb(NASDAQ: ABNB) and DoorDash (NYSE: DASH) are just the latest in a long list of promising businesses coming public using traditional means. We’ve also seen greater interest in special-purpose acquisition companies than ever before, with thought leaders like Social Capital founder and SPAC specialist Chamath Palihapitiyaoffering an alternative to IPOs that is friendlier to future category killers with huge potential.

No matter whether the market rises or falls, you can count on there being plenty of great companies to target with your investment capital.

5. The Stock Market Will Do Something You’ll Never Expect in 2021

Feel free to criticize perhaps my weakest prediction ever, but it’s the very nature of prediction, I think, that makes it a dangerous game to play.

Longtime Fool contributor and best-selling investment author Morgan Housel put it best in an amazing piece on the psychology of prediction. “History is the study of surprising events,” Morgan says, but “prediction is using historical data to forecast what events will happen next.” That disconnect means that your predictions inevitably miss the next long-tail black swan that comes from out of nowhere.

In 2021, that could come from a coronavirus vaccine setback, geopolitics, or natural disasters. Or it could come in the form of unexpectedly good news. Whatever the cause, you won’t be able to predict it — because it’ll be something you could never anticipate.

Put Away Your Crystal Balls

You’ll see plenty of predictions for 2021 in the coming days and weeks. Some of them will turn out to be true. Many of them will prove to be spectacularly false.

The best way to invest is to stop trying to predict the future. We concentrate on identifying companies that have already tapped into existing trends with huge growth potential. We know that not all of them will succeed — but enough will deliver market-beating returns.