Closing the chapter: 2013 lessons for investors

Published: Friday | December 27, 2013 Comments 0

Successful stock investors followed some simple advice this year: Don't worry, be happy.

Next year, though, they will need to temper that rosy approach.

In 2013, investors who blocked out the scary headlines about a possible government default, budget cuts, and concerns about when the Federal Reserve would begin to scale back its stimulus, did great. The economy wasn't robust, but it wasn't weak either. Earnings grew, even if companies achieved them by cutting costs rather than increasing sales. And the Fed gave the market a year-end bonus by keeping short-term borrowing costs near zero, even after dialing back its programme to hold down longer-term rates.

Final tally: Stocks are up more than 28 per cent.

The worrier's ultimate refuge - cash, bonds, and gold - actually caused even more heartburn. Havens like bonds are down this year: The biggest category of bond funds by assets, intermediate-term bond funds, has lost an average of 1.5 per cent. Gold is having its first down year since 2000, having declined 27.7 per cent.

Market strategists, on average, see more modest growth for stocks in 2014. The S&P 500 could rise five to seven per cent. Bonds should continue to struggle as interest rates are expected to rise.

tempering thoughts

Here are the positives from 2013 and some tempering thoughts for 2014.

SMALL CAPS WERE BIG: Here's where the stock optimists really showed up. The Russell 2000, an index that tracks smaller, riskier stocks, is up nearly 37 per cent, more than the Dow and the S&P 500.

STUNNING DEBUTS: IPOs are risky and also for positive thinkers. And they surged this year. The number of initial public offerings rose to its highest since 2000. When stock prices rise steadily and strongly, companies have incentive to roll out their stocks to the public. And investors want those new shares. The average IPO stock rose almost 35 per cent this year, outperforming the S&P 500, according to data from Renaissance Capital. In total, companies sold $55 billion of stock in 2013, an increase of 29 per cent from 2012.

NO HOLDING BACK: Another streak for bulls. The S&P 500 has gone 27 months without a downturn of 10 per cent or more. That compares with an average streak of 18 months between such declines, according to S&P Capital IQ.

Investors who sat out the rally in stocks are now left with a quandary. Do they buy now, with stocks more expensive, or do they stay on the sidelines and risk being left further behind?

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