2014 was definitely an interesting and exciting year for investing. The stock market hit amazing new highs and also had impressive returns. On the other hand, many investors will look back on 2014 as a year when the stock market made them anxious and uncertain, especially when stocks were seemingly on the verge of a flameout.
In other words, like most years, the stock market was up and down quite a bit in 2014, leaving the question; what lessons can be learned from what happened in 2014, and then applied to investing in 2015?
The first lesson is simply that, when it comes to the stock market, it’s never a good idea to let your gut reactions rule your decisions. Yes, 2014 was definitely not always a smooth ride, especially as we saw prices dip by 4% or more a total of 5 separate times.
The problem that most investors have is that they let their gut reaction make their decisions for them when it happens. When you couple that with the fact that figuring out whether a market dip is the start of something hugely negative or simply a minor setback is almost impossible. In other words, if you tuck-tail and run every time it looks like the stock market might have a meltdown, you’ll lose those big gains when the stocks recover (as happened last year five times).
Another excellent take away from 2014 is that diversification certainly works but, in some cases, the results might not be to your liking. For example, if 100% of your money was invested in the S&P 500 and you reinvested your dividends while riding out the ups and downs of the market, double-digit gains would be your reward today.
On the other hand, if you expanded into bonds or foreign shares, the net worth of your portfolio could have dropped quite a bit as the bond market earned about half of the S&P 500 and international stocks were down approximately 3% as the year ended.
Of course this isn’t to say that diversification doesn’t work, quite the contrary. Diversification isn’t done to maximize your returns, it’s done to manage your risk. By spreading your assets around, you protect your overall portfolio and also keep value swings to a minimum.
The fact is, some years you’ll wish you had your money in one type of asset, and some years in others. It’s practically impossible to know which assets will do well in any given year.
One last take away from 2014 is simply this; ignoring the noise being made by pundits and advisors is a good idea. Frankly, every time the stock market jumps up or down, someone steps forward to tell investors that the sky is falling.
Usually it doesn’t.
Your best bet is to settle on a nice mix of assets that goes well with your risk tolerance, and your goals, and stick with it. In 2014 that was a smart way to invest and, in 2015 and beyond, it will be as well.