For five years running stock funds (equity funds) have been very good investments, and in 2014 & 2015 the right funds might still be good investments. It’s all a matter of where to invest money going forward, because there are few good stock funds in a bad stock market.
Over the long term stocks have returned about 10% a year (on average) and stock funds have been good investments for investors in search of where to invest for higher returns. This does not mean that you can simply invest money in one and expect to make 10% every year. Yearly returns are heavily influenced by the general trend in the stock market.
While most investors follow the DOW (Dow Jones Industrial Average), most professional investors, like fund managers, are evaluated based on how well they perform vs. the S&P 500 Index. For most of these money managers, their job is to pick good investments and beat the S&P 500 (the stock market in general). Even good stock funds fail to do this on a consistent basis.
In the vast majority of cases, when an average investor asks a financial planner where to invest money for growth (higher returns) the recommendation is: invest in diversified domestic equity funds – the biggest and most widely held fund category. Where do they invest these mountains of cash? Answer: mostly in the 500 largest, best known corporations in America… those that are included in the S&P 500.
In other words, even good stock funds are rarely good investments in a bad stock market. The vast majority of them are diversified across a broad range of industries or sectors in the economy. As goes the market, so goes the average person’s stock funds. What can you expect if the market turns ugly and drops 50% in 2014 to 2015 as it did in 2000 to 2002 and again in 2007 to 2009? Diversified funds that take losses of 40% or less will look like pretty good investments. You can safely bet on one thing.
Even the truly good stock funds (diversified funds that actually beat the averages over the past five years) will lose money if we have a third major down market in 2014 and 2015. The stock market makes the rules, and in 5 years it has risen more than 150%. What can you do to avoid heavy losses in a future downturn? First, you can reduce your exposure to diversified domestic funds. Then the question to ask is where to invest money. Specifically, what are the good investments in equity funds when the market turns ugly?
There are always good investments for average investors and always a few good stock funds if you know how to find them. They don’t diversify broadly – they focus on specific industries. Nobody really knows where to invest money when the sky is falling, but I’ll tell what’s worked in the past.
When the market has a bad week look for stock funds that bucked the trend. Also look for fund categories that underperformed in the past year or two. For example, gold stock funds were losers in 2013. They could be good investments in 2014 and beyond and are worth watching. Over the past couple of decades the following three fund categories have sometimes been good stock funds in a bad market: gold, natural resources, and real estate funds. They could again be your answer to where to invest… as an alternative investment that bucks the trend.
Uncertain times call for greater diversification because no one really knows where to invest. Up markets are always followed by down markets and good stock funds for an up market are seldom good investments in a down market. Don’t stand flatfooted while your stock profits evaporate. There are always good investments somewhere, and that will be true in 2014 and 2015 as well.