Happy New Year to you! As we kick off 2014, I want to start by looking back at last year. That’s the best way to move forward, right? There was an article in the Wall Street Journal last week that declared “Boring Investors” as the big winners of 2013.
What is a boring investor?
I wouldn’t personally call it boring, but they defined it as people who simply bought and held a “plain vanilla” portfolio of stocks. Those were the winners of 2013—NOT the investors who employed risky, complex strategies or who tried to time the market or chase high returns in emerging markets or hedge funds. Simply owning an S&P 500 Index fund returned a whopping 32% with dividends last year. That’s incredible! By contrast, emerging markets, commodities and hedge funds all lagged those results significantly.
So what’s the takeaway as we move into 2014?
The lesson is that you don’t have to be a hotshot to make money in the stock market. In fact, overconfidence can be a complete liability. The flip side is that so many people don’t invest because they feel they don’t know enough and are intimidated. You don’t have to have the fanciest, most expensive, international managers and you don’t have to know the ins and outs of every move the market makes. You just need to get in the game. Because here’s the thing: Those so called “boring” investors were still INVESTORS. According to Morningstar, the average mutual fund focusing on large-company stocks was up 32% in 2013, and the average fund focusing on small company stocks was up 38% for the year. That’s a stunning one-year return for U.S. equities. Will every year be like that? No. But if you kept your money in a savings account last year instead of the stock market, you’d have ended up down after inflation. The interest rate on a savings account was a pathetic 0.1% last year. ZERO POINT ONE percent! That’s basically zero, and no one thinks we’re going to see that change any time soon.
So 2014’s savings shouldn’t be in a savings account?
Exactly. By all means, everyone should have an emergency fund in their savings account, but if you’re not investing in the stock market, you simply cannot afford another year of sitting on the sidelines. This is the year to get started. The best way to dip your toe in is with dollar-cost averaging.