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For five years in operation, equity funds (stock funds) have been very good investments, and in 2014 and 2015 the right funds could still be good investments. It’s all about where to invest your money in the future, because there are few good stock funds in a bad stock market.
In the long term, stocks have returned around 10% per year (on average) and stock funds have been good investments for investors looking for where to invest for higher returns. This doesn’t mean that you can just put money into one and expect to earn 10% every year. Annual returns are heavily influenced by the general trend of the stock market.
While most investors follow the DOW (Dow Jones Industrial Average), most professional investors, such as fund managers, are evaluated based on their performance 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 consistently.
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 national equity funds, the largest fund category, and more. extended. Where are these mountains of cash invested? Answer: Mainly in the 500 largest and best-known corporations in the United States … 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 in a wide range of industries or sectors of the economy. As the market progresses, so do the stock funds of the average person. What can you expect if the market turns ugly and falls 50% in 2014 to 2015 as it did in 2000 to 2002 and again in 2007 to 2009? Diversified funds that have losses of 40% or less will look like pretty good investments. You can safely bet on one thing.
Even really good stock funds (diversified funds that actually exceed the averages of the last five years) will lose money if we have a third major bear market in 2014 and 2015. The stock market sets the rules, and in 5 years it is up more than 150%. What can you do to avoid big losses in a future recession? First, you can reduce your exposure to diversified national funds. So the question to ask yourself is where to invest the 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 some good stock funds if you know how to find them. They do not diversify widely, they focus on specific industries. No one really knows where to invest money when the sky is falling, but I will tell you what worked in the past.
When the market has a bad week, look for stock funds that buck the trend. Also look for categories of funds that have underperformed in the last 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 two decades, the following three categories of funds have sometimes been good stock funds in a bad market: gold, natural resources, and real estate funds. Again, they could be your answer to where to invest … as an alternative investment that bucks the trend.
Uncertain times call for more diversification because no one really knows where to invest. Bull markets are always followed by bear markets and good stock funds for a bull market are rarely good investments in a bear market. Don’t sit still while your stock earnings evaporate. There are always good investments somewhere, and that will also be true in 2014 and 2015.