The best investment strategy for 2014 is an investment strategy geared to reducing portfolio risk through better asset allocation and diversification across the asset classes. The year 2014 promises an increase in uncertainty and risk… so here we focus on the average investor’s best investment strategy and best asset allocation for investing money to stay out of financial trouble if things turn ugly.
Asset allocation, defined: when investing money, where and in what proportion you invest money across the various asset classes. For example, you might invest 60% in stock funds and 40% in bond funds. This simple asset allocation has worked quite well for over 30 years and many professionals still recommend it as the best investment strategy for the average investor. Losses in stock funds have often been offset by gains in bond funds and vise versa. In 2014 and beyond, this may not be the best way to invest money.
We may be entering a new economic environment that few of today’s investors are familiar with, and fewer yet understand. Today’s investors understand that stocks funds can be risky, but many are not aware of the risks involved with investing money in bond funds. Both can be losers if unemployment remains high in a slow-growth economy and interest rates rise significantly. That’s what the USA could be facing in 2014, so here are my suggestions for how to protect yourself and how to invest money with the best investment strategy going forward.
We’ll start with your best investment strategy for bond funds. Many investors today, especially older folks, consider their bond funds to be their best investment. After all, bond funds have basically been good solid performers since 1981 (when interest rates peaked at double digits). When our government quits forcing interest rates down toward record lows (using quantitative easing), rates could rise significantly and send bond prices and bond funds DOWN in value. That’s the way the bond market and bond funds work.
If your present portfolio asset allocation is allocated 40% or more to bond funds, consider cutting your exposure here to about 30%. Exchange any long-term bond funds (those with average maturities of 10 years or more) you may have for intermediate-term funds with average maturities closer to about 7 years. Investors holding the latter may take losses when interest rates rise significantly – but folks investing money in long-term funds can expect HEAVY losses.
Your best investment strategy for diversified U.S. stock funds: an asset allocation of less than 50% of total investment assets. The average stock fund has returned well over 100% in the past 4 or 5 years. If you missed out, investing money here now is probably not the best strategy. I would also favor stock funds that hold high quality, large-cap stocks with a dividend yield of 2% or more. Now is not the time to get aggressive.
So, where do you invest the rest of your money? There are two other asset classes to consider: CASH (safe, liquid money), and ALTERNATIVE INVESTMENTS (like gold, real estate, and natural resources like oil). In times of high uncertainty when both stocks and bonds are pricey, cash is king. Investing some money for safety in short-term CDs, insured savings accounts, T-bills or money market funds makes good sense as a part of your investment strategy. You may also want to invest money in specialty stock funds that invest by specializing in sectors like gold, real estate, or natural resources.
In simplest terms, the best investment strategy for 2014 is broad diversification in your asset allocation… with less emphasis on bond funds and diversified stock funds.