We’ll have new specific ideas coming soon, but the basic themes for investors remain consistent. Entering 2015, there are several key ideas for individual investors to keep in mind. Republicans will formally take control of both the House and the Senate in a few short days – resist the temptation to wax political. Instead, think about what actions are more likely now, and how that could impact your portfolio. With Yellen tapering off QE3 (and no immediate market collapse coming as a result), think back to our “Three Fearless Forecasts.” Remember that fighting the Fed is a losing proposition. Above all else, understand that the market climbs a Wall of Worry. We’ve had a lot of very serious issues crop up in 2014, but we’ve also had the most significant crises averted. Leaders in both business and political spheres are doing their best to avoid catastrophe, and they’re successful more often than not.
I try to refresh the concepts and ideas each week, emphasizing the best themes from my reading. My overall recommendations do not change as rapidly – nor should they. Investors should not be switching around their choices every week.
One of my major themes for the year has been the “great rotation” from bonds to stocks. This has three aspects:
- Bond yields are so low;
- Bond prices have fallen, leading to absolute losses for conservative investors;
- Stocks have surged.
This rotation is just getting started. Our own themes are the same, but I will also do a “year ahead” preview pretty soon.
Here is a summary of our own current recommendations for the individual investor.
- Ignore Headlines. The challenge for investors is to distinguish between the major trends and the short-term uncertainty. The main themes are not related to headlines news, even though sentiment may drive market fluctuations. Do not be seduced by the idea that you can time the market, calling every 10% correction. Many claim this ability, but few have a documented record to prove it. Most who claim past success are using a back-tested model. Please see The Seduction of Market Timing.
- Risk Management. It is far better to manage your risk, specifically considering the role of bonds and the risk of bond mutual funds. As I emphasized, “You need to choose the right level of risk!” Right now, it is the most important question for investors. There is plenty of “headline risk” that may not really translate into lower stock prices. Instead of reacting to news, the long-term investor should emphasize broad themes.
- Bond Funds are Risky. Investors have been surprised at the losses, which will continue as the long end of the interest rate curve moves higher. You need to have the right mix of stocks to benefit from a rising rate environment.
- Stepping in gradually. If you are completely out of the market, you are not alone. Consider buying dividend stocks and selling calls against them. This strategy has been working great both for our clients and for many readers. (Thanks for the email responses!) This will work in a sideways market. You can also buy some stock in the sectors with the best P/E ratios.