Can Retirement Investors Expect a Repeat of 2013?
Reprinted courtesy of MarketWatch.com.
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Before you finalize your investment strategy for 2014, I hope you will take advantage of the lessons we can learn by looking back at what happened last year.
Sure, the past is past and can’t be changed; and the future doesn’t lend itself to accurate predictions. But if you want to develop reasonable ideas about what to expect from your investments, there is no better guide than the past.
One key lesson should stand out: Market predictions and expectations are often very far off the mark. In other words: Wrong.
One year ago, many experts looked into their crystal balls and saw that 2013 would be a year of only limited returns. A number of surveys found the average prediction of stock returns varied from 7% to 10%. Vanguard’s chief analyst predicted only 6% to 7%.
Many analysts thought interest rates would skyrocket in 2013, making it a catastrophic year for bonds and other fixed-income investments. Gold prices were expected to continue rising.
I made my own predictions a year ago, though they weren’t very exciting. And I’m making the same two predictions for 2014: First, in any given year it is probable that some investments will work for you and others will work against you. Second, if you have a properly diversified portfolio, it’s highly likely you will achieve a reasonable return.
Stock funds tend to bring growth, and bond funds tend to help stabilize your portfolio in years when stocks are poor.
Fortunately for most of us, 2013 wasn’t one of those years. In fact, it was one of the best stock-market years of this century.
Most of the popular U.S. stock indexes were up between 32% (the Standard & Poor’s 500 Index) and about 37% (Nasdaq Composite, small-cap and small-cap value).
Beyond the U.S. borders, returns were less consistent. The Japanese stock market was up nearly 60%; broad international blend indexes were up “only” about 20%. International large-cap value stocks were up about 40% and international small-cap value stocks up about 34%.
On the down side, emerging markets were laggards, with Vanguard’s fund down 5.2% for the year.
I know some people who had all their money in gold last year. That wasn’t a good decision, as bullion was down 28% and gold funds lost 40% or more.
Although bond investors didn’t get hammered as much as many people thought they would, 2013 wasn’t a great year for bonds: Vanguard’s broadly diversified total bond market fund was down about 2.3%.
What do all those numbers add up to? I think it’s this: In many ways, 2013 was business as usual.
Stocks outperformed bonds. Small-cap stocks did better than large-cap stocks. Value stocks outperformed growth stocks. Diversification continued to work.
I’m a big fan of international diversification. And while large U.S. stocks did considerably better than their international counterparts, I find it hard to think of 20% gains (large-cap international) as anything worth complaining about.
Although it was a losing year for bonds in general, the Vanguard monthly income strategy that I’ve recommended for many years ended 2013 with a slight (0.5%) gain. This combination, made up of equal parts high-yield, GNMA, intermediate-term investment grade and short-term investment grade bonds, was paying about 3% a year.
And what of my own investments? I consider myself a conservative middle-of-the-road investor. One-tenth of my portfolio is managed with a combination of market timing and leverage. The rest is split equally between buy-and-hold investments and market-timed ones – broadly diversified in each case.
My buy-and-hold account is allocated 50/50 between stocks and bonds. My timing account is 70% stocks and 30% bonds — a combination that has about the same risk characteristics as my buy-and-hold holdings.
What matters most to me at the end of the day is the performance of my whole portfolio. Last year, it was up 15.4%. For me, that’s a home run.
Despite last year’s robust gains, not all investors are happy campers right now. Many people are still sitting in cash after the losses they suffered in 2008 and 2009. Inevitably, they are struggling with how to get back into the market. Unfortunately, there is no good answer for them.
Any time you get out of sync with your investment discipline, there’s no sure path to getting back into the game. For people in this uncomfortable position, my best advice is to go back to the basics.
Sometimes it works to adopt the mentality of starting over. Determine your needs and your tolerance for risk. Then figure out the lowest-cost way to get where you need to go.
For investors who have been burned by bear markets, getting back in can be emotionally challenging.
Some people get so fed up with mainstream investments (stocks, bonds, cash) that they load up heavily on alternative investments like gold and other commodities, currency funds and even mutual funds that short the market. Although some parts of that formula occasionally produce favorable short-term results, generally such alternative investments are unproductive in the long run.
Enough of looking backward. What does 2014 have in store?
When I look to the future, I try to look with a perspective of 10 years or more. What I see is nothing new: The highest probability of long-term success will come to investors who have broadly diversified portfolios of stock funds, carefully balanced with the proper amount of fixed-income funds.
A handful of easily identified equity asset classes have long histories of success through many market cycles. Those are the ones you should own — and you should own them in a way that’s tax-efficient and cost-efficient. As I’ve said repeatedly, for do-it-yourself investors, Vanguard’s index funds and ETFs are the gold standard.
For investors who do as I do and rely on a professional adviser, Dimensional Fund Advisors has superior no-load funds in all the best asset classes. That’s where my money is for 2014.
Richard Buck contributed to this article.