Hit the rewind button to this time last year and scant few had the U.S. economy leading the world but we did it. USA! USA! USA!
Reflecting economic growth, the S&P 500 is up more than 25 percent with dividends reinvested while the Russell 2000, measuring U.S. small companies, soared over 30 percent (Dec. 20, 2013). Gross Domestic Product (GDP) has grown from .1 percent in the fourth quarter of 2012 to 4.1 percent in the third quarter of 2013. GDP growth leads to earnings growth and when earnings grow so do stock prices.
Roaring stock prices make everyone a stock market genius. Tesla investors made enough money to buy one. Paying someone to buy individual stocks or to use actively managed mutual funds simply underperforms when adjusted for risk. At our firm we believe the best way to reach your financial goals is to use low cost index funds and rebalance regularly. We look for lagging asset classes. International stocks, as measured by the Europe, Asia and Far East Index, grew double digits (13 percent) but significantly less than their U.S. counterparts. Emerging markets fared even worse, sporting a negative return as did commercial real estate investment trusts (REITS).
I have no idea which asset class will outperform next year but a diversified portfolio with regular rebalancing will help you reach your financial goals. Of course, that strategy does not guarantee financial nirvana you have to save appropriately while living within your means. Don’t expect the stock market to cover bad saving habits.
What did the worst? It’s hard to say but gold performed lousy losing almost 30 percent this year. REITS and emerging markets lost money also but at least they paid dividends for living expenses. Not so with gold, an ounce of gold on Jan. 1, 2013 is still an ounce of gold today and will be forever. In January of 2009, the United States economy was in as bad a shape as it has been in since The Great Depression. I am absolutely certain the majority of Americans had no clue how close we were to economic Armageddon in the 4th Quarter of 2008. Buy gold, right? Gold purchased in January 2009 returned a nifty 33 percent over the five years … not too shabby.
On the other hand, an investment in the United States Broad Market Index, essentially a bet on the U.S., returned over 110 percent plus dividends. If a few gold coins in a drawer helps you sleep at night go for it, but remember Warren Buffett doesn’t own any gold. Buffett, through Berkshire Hathaway owns the railroads that haul ore. During the California Gold Rush, Levi Strauss made more money selling blue jeans to miners than the miners did scratching around for gold.
Earlier this month the Fed backed off Quantitative Easing albeit slightly. Instead of a swooning market, as forecast, prices soared … so much for predictions. Many see U.S. stocks gaining double digits next year, but I look for more muted returns — mid to high single digits. GDP growth could slow if consumer demand tapers; the USA and 30A still need more job growth.
Warren Buffett believes index funds best suit individual investors. Active management is a fool’s errand and/or marketing hokum.
Buz Livingston, CFP has a Blue Mountain Beach based fee-only, hourly financial planning and investment management firm. For more information, visit www.livingstonfinancial.net or come by our new office at 2050 Scenic 30A, M1-Unit 230, Redfish Village.