12/20/2013 7:45 PM ET|
7 things you should have learned in 2013 -- but didn't
These 7 lessons from the stock market will help you in 2014 and beyond.
It's that tiresome time of year when financial pundits trot out "investing lessons" from the last 12 months.
These are commonly obvious, rear-facing recaps that serve nobody.
After all, who cares if 2013 was the year of social media if you weren't in on the Twitter (TWTR) IPO or if you didn't buy Facebook (FB) at $25? And what good is calling 2013 an ugly year for emerging markets if you've already ridden Brazil down to the bottom?
So today, I'd like to give my twist on this year-end theme by making things a little more forward looking.
Here are strategies that will serve you well in 2014 — and perhaps longer — that you should have learned if you were watching something other than Carl Icahn, Twitter or Tesla in the past 12 months:
1. Buy and hold works
Vanguard sucked up $130 billion of inflows in 2012 thanks to its rather boring but effective lineup of low-cost index funds. And investors who piled in were richly rewarded in 2013, as the major indexes delivered their best run since 2003.
But if you think this was just a one-year fluke, think again. Consider the S&P 500 (SPX) has provided a total return of about 10 percent on average every year from 1926. And more recently, the total annual return of the S&P has averaged about 15 percent since 1970.
Also consider that when Mark Hulbert compiled his five-year rankings of more than 200 investment-advisory services a few months ago, the top three were ALL buy and hold strategies.
The lesson of 2013 isn't just that buy-and-hold investing worked (past tense), but that it works (present tense). Remember this before you start tinkering or fretting about valuations in 2014.
2. Forecasting doesn't work
Robert Seawright recently put together a great list of Wall Street's "best" forecasts for 2013… which all missed the mark by between 16 percent and 30 percent.
The "smart money" analysts also have poor track records with individual stocks, too. Case in point: In May, an analyst at Maxim Group who upped his price target on J.C. Penney (JCP) from $16.50 to $27 — right before Penney gave up 50 percent and currently trades under $9 a share. Deutsche Bank's forecast was almost as bad, with analysts there increasing their price target to $18 in May.
But hey, at least they only considered JCP a "hold" at the time.
Sure, some forecasters get it right. But nobody gets it right frequently enough to be depended upon — so stop using investment bank research as your primary source for buy or sell calls. It will only end in disappointment.
3. Stop buying negative yield TIPS
If you want to have a fun debate on "real" vs. perceived inflation, much in the way folks debate whether the original "Star Trek" or "The Next Generation" was the superior television series, feel free.
But please don't let your hyperventilation about hyperinflation lose you money — again — in 2014.
Consumer price data from the Bureau of Labor and Statistics shows the rate of inflation hasn't been above 2 percent since October 2012, and hasn't been above 3 percent since December 2011.
As a result, if you invested in Treasury Inflation Protected Securities via a fund like the iShares Barclays TIPS Bond ETF (TIP) to start 2013, you lost about 9 percent of your capital vs. a 25 percent rally for the S&P 500.
But despite this, TIPS have regularly auctioned at negative yields since 2010.
Come on guys. This isn't debate club… just swallow your pride and stop losing money.
4. Be careful with long-term bond funds
The "taper" officially started this week as the Fed cut back on bond purchases.
And while no one knows precisely how the Fed's rates policy will evolve in 2014, a few months back we did get a taste of what happens with even a modest uptick in interest rates.
Consider that from May to early July, when rates on the 10-year T-Note rose about 1 percent, the iShares 20+ Year Treasury Bond ETF (TLT) lost about 15 percent in principle. That's because 95 percent of the holdings are more than 25 years in duration, and the longer the duration the more susceptible bonds are to interest rate increases.
Rates have rolled back a bit, but you can bet they will rise again at some point in 2014. This rough period of rising yields in early 2013 will be instructive as to how things may play out in the New Year.
Consider this as you plot your long-term bond fund holdings in 2014.
More from MarketWatch:
- What big money is betting on in 2014
- 10 money-making investment ideas for 2014
- Top tech trends to watch in 2014
5. You have a LONG way to go
What an amazing 2013, right? Well, when you thank your lucky starts for those 25 percent gains you enjoyed this year, you may want to pray for a repeat performance in 2014. And 2015. And 2016…
Because even after these gains, the average American is woefully behind when it comes to retirement planning.
In early 2013, Fidelity was quick to announce that its average IRA balance this year hit a five-year high… but that was to just $81,000 . The same for Fidelity's average 401k balance of those over 55 — it was up nicely, but only to $255,000.
The old rule of thumb used to be that a retiree needed about 10 times their last year's salary to retire comfortable. But nowadays, with Americans living longer and health care expenses spiraling ever higher, even a million dollars in your retirement portfolio may only buy a modest retirement should you be lucky enough to live 20 to 30 more years after quitting the rat race.
Don't use 2013 as an excuse to take it easy on your retirement plan. You likely have a very long way to go still.
6. Personal preference is not an investing strategy
As I wrote a few months ago, Warren Buffett's folksy "buy what you know" advice is a portfolio killer for people who think personal preference is an investing strategy.
Your frustration with Facebook ads and privacy settings didn't stop the stock from doubling in 2013.
Your grim assessment of brick-and-mortar retail didn't stop Best Buy (BBY) from jumping 250 percent.
Your mockery of Hewlett-Packard (HPQ), its cheap laptops and overpriced printers hasn't stopped the stock from surging 80 percent this year.
Remember these lessons.
Also, remember the flip side of personal preference is also true. Case in point: Those Apple (AAPL) fanboys who were super bullish a year ago and had a big bucket of cold water thrown on them with this year's gross underperformance.
There are a host of amazing companies out there that may crash and burn in 2014 despite their consumer appeal. And plenty of much-maligned companies will rise.
That's Wall Street. So make sure that your investing thesis is based on market trends and earnings data… not just consumer hype and the not-so-informed opinion of your neighbors.
7.You can't win if you don't play
Look, calling the next bubble is fun if you're a financial media troll looking for page views or if you're just making conversation while huddled in your bunker this holiday season.
But bubble talk has been incredibly unproductive in every sense over the last few years.
And it will continue to be so in 2014.
Right now, unemployment is 7.0 percent, the lowest level since 2008. GDP for third quarter was revised up from 2.8 percent to 3.6 percent. The Investors Intelligence Survey conducted after Thanksgiving showed about 85 percent of investors were bullish — the highest reading since 1987.
Oh yeah, and the S&P is up 25 percent, its best year since 2003.
You think it's really all going to stop NOW, after what we've been through?
To be clear, I'd never advocate dumping every penny into stocks because of the big risk involved with that. But 2013 should be proof positive of there is ALSO great risk (or in economic jargon, "opportunity cost") that comes with sitting out the stock market.
If you keep sitting on your hands, you will never do better than the measly returns offered by the bond market and so-called "high interest" CDs.
If that's your idea of a winning hand, so be it. But if not, consider upping the ante for a few hands in 2014 – even if the lion's share of your portfolio is focused on capital preservation.
More from MarketWatch:
VIDEO ON MSN MONEY
What we should have learned in 2013 is that anything can happen in a market controlled by the Federal Reserve, even if it doesn’t make any sense at all. In fact, that’s the most likely thing that will happen under such circumstances, i.e., something that doesn’t make any sense at all.
Every investor has their own risk-reward value system, as it should be. I would rather be the guy who invested in things that will likely preserve the long-run purchasing power of his money than one who is betting the stock market will keep rising at ten times the rate of GNP growth (like it did last year), only to find that it will take ten years to get my money back after it crashes.
“Past experience is no guarantee of future performance”. Best disclaimer ever.
If you can swing a hammer and float a trowel a lil' real estate seems so much easier and profitable than the market. So many neighborhoods sprung up after WWII and just about every one has a house or two that need a bit of work but are going for nearly 1/2 of the surroundeing homes. Elbow grease and materials , sell it for 10k below the rest and still make good profit.
1-Cash in hand always beats a financial sheet or any piece of paper.
2-Never trust anyone who wears a suit with YOUR MONEY!!!!
It was a pretty nice year and we are down to the final hours....
Goodwill and Prosperity to all in 2014...
Take all the trash out and burn it. Biggest problem solved!
God bless a Repukelican free America!
The Guy couldn't just state 2013 was a great year for stocks and 2014 could go either way. Everybody is a freaking Genius when stocks are going up, the real tests comes when for extended periods, stocks move sideways or down. Then you don't hear jack from these fake Market Gurus. Of course then the jackals will tell you to hold to infinity, another sure way to lose your shirt and more as National Debt Soars and the Feds lose Control. Nothing wrong with taking profits. Greed will destroy the best investor.
Hey Brent the pensioner
I fail to see ANY difference between socialist party 'a' or socialist party 'b'; except for the rhetoric
""Fidelity was quick to announce that its average IRA balance this year hit a five-year high… but that was to just $81,000""
perhaps Fidelity forgets that many people have multiple mutual funds thru different institutions.
therefore they only see my ONE account with them and i have several with their competitors.....
so MY average is quite low and very misleading
I bought a majority of my current portfolio in 2009. It has done well. Not buying too much right now except for coal stocks.
Doesn't matter too much to me whether the market continues to rise so long as I am collecting dividends and distributions while on the ride.
If the market goes down, better to use that dry powder to load up again.
A politician. TELLING THE TRUTH?? What planet are YOU from?
As the old saying goes: Q: Know how to tell if a politician is lying? A: Their lips are moving.
Forecasting doesn't work, well then stop forecasting DOW20K and DOW30K. Stop forecasting that buy and hold works. Stop forecasting what will happen to long term bond funds. Stop forecasting yields returns on TIPS. Funny how a guy tells folks what not to do, then precedes to do it himself. It's no secret that Record Wealth Globally has been seen since the recovery from the Great Recession.
And yes, there has been a Recovery. We can debate all day to the Reasons but there absolutely has been a recovery. Nor has that recovery been solely low paying Jobs. There's a fracking Boom in this Country and those jobs pay well in comparison. Airlines are predicting a Record Year for Profits. We are seeing a Return to America Push for manufacturing. Auto Sales have almost recovered to levels not seen since before the Great Recession. So in spite of the negative aspects we hear from the Usually Suspects, things have never been as Gloomy as some have stated. Eventually that will changed, IT ALWAYS DOES. Boom and busts, that's our history.
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