Key lessons from 2014:
- "The stock market" is not just the Dow Jones Industrial Average or the Standard & Poor's 500 Index. In fact, the S&P 500 is about 33% of the world stock market.
- The world stock market was only up 3.8% in 2014.
- There was a HUGE difference of 18.75% between U.S. large companies and foreign large companies: U.S. up about 13.25% and foreign down about 5.25%. Since 1999 the difference has usually been +/- 8% or less.
- U.S. large companies have outperformed foreign large companies since 2010 by an annualized return of about 9%. Investors may forget that large foreign companies provided the same outperformance in reverse from 2002-2007.
- U.S. large companies beat U.S. micro cap and small value stocks by over 10%.
- Value style stocks across all sizes in the U.S. and international markets under-performed broader stock market indices; historically value outperforms.
- Bond returns were surprisingly higher than expected with returns in the 5% to 6% range for intermediate term bonds, with tax-free municipal bonds doing even better. Short term bonds were a modest 1%+ return, as expected.
- Conservative, low volatility strategies designed to cushion stock market volatility and combat low interest rates ended the year with returns in the 1% range.
Key lessons for 2015 and beyond:
- Risk and return are related (the 3 R's).
- Successful investing is a contrarian process. Sell high, buy low and be willing to do what your gut tells you not to do. Don't follow the crowd.
- Successful investing requires a tolerance for volatility and a long-term focus.
- Forecasting is a futile exercise. Our crystal ball is no clearer than yours, therefore, we offer no forecast for 2015 and beyond.
- A strategic asset allocation in a broadly diversified, multi-asset portfolio emphasizing passively managed funds is a sound investment strategy.
As always, please contact us with any questions or news or comments.
Happy New Year!