Stock investing is the growth engine of your investment portfolio, but in 2014 and beyond, your best investment strategy could be to cut your investment exposure in stocks (also called equities) and stock funds (also called equity funds). Face it: Equities and some stock funds have run up 150% in the past four to five years, and this run could be about over. Why invest money here (more money) now?
Stock investing has been very profitable in the past few years. The truth is that stocks and stock funds have been the best investment for the average investor for questionable reasons. Who wants to invest money in bonds, bond funds, or any other interest-paying investment vehicle in this extremely low interest-rate environment? In stock investing, investors want to see a growing economy, rising corporate profits, and growth in corporate sales. In recent years, corporate profits have resulted from cost-cutting vs. increasing sales. Corporate America has been reluctant to hire employees.
Our government has, by design, kept interest rates artificially low to stimulate the economy and bring unemployment down. They’ve done this by BUYING longer-term debt securities, like their own Treasury securities… to $85 billion monthly in 2013. This made stock investing the best investment game in town and kept interest rates low. In 2014, many economists expect this will unwind, and interest rates will likely increase. At that point, stock investing could be a whole new ball game. Equities might not be your best investment.
Invest money in stocks or stock funds if you believe our government’s efforts will create a new wave of economic growth, jobs, and corporate sales. Do not rush out to invest money (more money) if you think higher interest rates will follow and choke economic growth. Remember, higher interest rates can hurt sales as purchases on credit (cars, homes, credit card purchases in general) decline. Higher rates can also hurt corporate profits because they increase borrowing money costs. Corporations borrow a LOT of money.
That’s one view of stocks for 2014 and beyond, based on a fundamental idea of stock investing. The other approach is the technical viewpoint. With the stock market on a four to five-year roll, near all-time highs, and up 150%… it could be due for a correction. If you invest money in stocks or funds now, you could arrive at the party late. This is not rocket science, but consider 2000-2002 and 2007-2009. These brutal bear markets handed investors losses in the neighborhood of 50%. Only after these bear markets ended were stock funds the best investment for the average investor (for about five years).
Well, it’s been about five years now since the recession (financial crisis) was officially put to bed. High unemployment is still with us, and economic activity and growth are nothing to write about. The real dilemma for investors in 2014 and beyond is that there appear to be few (if any) good or best investment prospects on the horizon. The only cheap asset class around is CASH. To earn even 1% on a CD, you must shop around. Why invest in a money market fund when they pay virtually nothing?
When investors look at the apparent lack of investment opportunities and see equities going up, they tend to want to jump on the bandwagon and invest money in stocks and equity funds. History tells us that stock investing in an inflated market can be dangerous to your financial health. Sometimes, your best investment is safe and boring, like a short-term CD, savings account, or money market fund. In 2014, your best investment strategy may be to cut back on stock investing and opt for more safety.
Author James Leitz is a retired financial planner with an MBA (finance) and 40 years of investing experience. His complete investing guide for beginners, Invest Informed, teaches how to invest, starting with investment basics. Check out his book.
