There’s a saying, trees don’t grow to the sky. What does that have to do with investing? Everything! Especially after a year in the stock market like 2013 was. Based on the S&P 500 index, the market returned 32.39% last year, when dividends are added in. That’s an extraordinary year. But just like trees, the stock market won’t go up for ever.
With that in mind, are you planning to buy, hold or sell stocks in the new year? I’m not predicting a market decline in 2014, and certainly not a crash – I know nothing more about the direction of the stock market than you or anyone else. But logic suggests that exceptional years are, well exceptional, which is to say they’re unlikely to be repeated. And sometimes taking some profits off the table after a big run-up is a healthy thing to do.
What investment changes might you make in 2014, on the heels of such an explosive year as 2013?
Put additional investment capital into cash and cash equivalents
2014 may be an excellent year to begin increasing your cash position. You can do this simply by putting any additional investment capital into cash, without liquidating any of your equity positions. This will enable you to accumulate money that can be used to buy stocks later on this year or next, in the event that stocks fall.
If you sell equity positions in order to raise cash, that will also have the effect of locking in the spectacular gains that you have through 2013. And again, it will keep you liquid to take advantage of what could end up being an even more favorable investment climate in the future.
Move into more conservative stocks
You can also begin shifting your equity positions into more conservative stocks. Prominent on this list are high dividend paying stocks. Not only will this provide you with an ongoing cash flow, but above average dividends also provide at least some insulation against market declines, as investors increasingly seek income.
This may also be a good time to move into special situations stocks. This would include companies that have exceptional future prospects. Even if the general stock market were to level off or decline, it is possible for such stocks to continue rising because their potential is out of proportion to the rest of the market. Easier said than done, I realize, but investors become more selective in less predictable markets.
Exit stocks in favor of funds
Another way to lower risk without exiting equities is to switch from individual stocks to funds, particularly index funds. If the market does go down, it will take most stocks with it. However, certain individual stocks can get seriously pummeled in a down market – much more so than the overall market will.
Index funds will ensure that you won’t do anything worse than what the general market does. It would be nice to be able to avoid market declines altogether, but it’s not possible to do that and stay in the market. Index funds tend to be a lot more stable in declining markets than individual stocks are.
Invest outside the stock market
All investments run in cycles. For example, from about 2002 through 2011 gold was riding a steep curve higher. But 2013 saw a decline by something like 26%. And so it is with virtually all investment classes, including stocks. Not only did the stock market return in excess 32% in 2013, but the overall market is up about 250% from its 2009 lows. That doesn’t mean that the stock market will decline in 2014, but it does bring us closer to the point where stocks will fall out of favor for a time.
If that’s the case, it may be time to look at other investments outside the stock market. Rental real estate can be an excellent alternative. Like high dividend stocks, rental real estate is also primarily an income-based asset. Very often when money exit’s the stock market, it flows into real estate looking for better returns.
There’s also the possibility that precious metals will return to prosperity. If that’s the case, you can buy them right now for at least a third less than what they were at the market peak two years ago. It’s putting the old saying – buy low, sell high – into practice.
Invest in a business
Though we don’t usually think of a business as an investment, that’s exactly what it is. When you buy or build a business, you are creating an investment. The major difference is that it is one over which you have primary control. If you are particularly good at what it is you do for a living, starting your own business could be one of the lowest risk forms of investment possible.
This can work especially well if you have done well in the stock market over the past few years. You will simply be transferring capital from one promising asset – one which may in fact be at or near its peak – to another.
Will 2014 be the year that you become an entrepreneur? The strong stock market performance in 2013 just may have created the possibility.
Will you buy, hold, or sell stocks in the new year? What investments have you considered as possibilities in the event that you decide to sell?
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.