Why 2014 Is a Critical Year for All Investors

You'd be excused for concluding that the stock market is too high and should be avoided. Following last year's epic performance, in which the S&P 500 advanced by nearly 30%, there doesn't seem to be much gas left in the proverbial tank. As Motley Fool contributor John Maxfield explains, however, this thought process is bound to produce sub-optimal returns over the long run.

Jan 4, 2014 at 3:00PM

Last year was an epic one for the stock market. But just how good was it, and what does that mean for 2014?

After a 13% increase in 2012, you would've been excused for concluding that stocks didn't have much juice left in the tank. With the benefit of hindsight, however, we can clearly see that this belief was gravely mistaken.

Not only did the S&P 500 (SNPINDEX:^GSPC) finally eclipse its pre-crisis high in 2013, but the widely followed index notched its largest single-year advance in history, shooting up by 422 points. This was nearly twice the second-biggest margin of 259 points in 1998 -- that is, during the lead-up to the technology bubble.

On a percentage basis, the S&P 500 closed out the best year in more than a decade thanks to a 29.6% advance. Investors would have to go back to 1997, when the broad-market index was up by 31%, to top this mark. And it was the fourth-best relative annual performance since 1970, or more than four decades ago.

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The big question now is: What does this mean for 2014?

Just like last year, it's easy to think that the market has advanced too far too fast. Here's how one financial commentator put it:

Despite the [Dow Jones Industrial Average's] hitting pre-crash highs, companies reporting positive earnings, and the financial media saying we are looking at the "beginning of a new bull market," the stock market is on the verge of another historic collapse.

On the flipside, it's equally tempting to conclude that the market could continue its upward momentum for yet another year. Corporate profits are at historic levels, and investor sentiment is improving -- albeit slowly and somewhat behind the curve.

This is the position taken by renowned investor Jeremy Grantham:

My guess is that the U.S. market, especially the non-blue-chips, will work its way higher, perhaps by 20-30 per cent in the next year or, more likely, two years, with the rest of the world, including emerging market equities, covering even more ground in at least a partial catch-up. And then we will have the third in the series of serious market busts since 1999.

So, which is it? Is the market too high? Or is it merely in the fourth or fifth inning of an ongoing bull market?

The answer is: We have no idea.

Timing the market is a fool's errand. It can't be done. Or, rather, it can't be done systematically -- that is to say, absent luck. This is no less than an axiom of informed investing, supported by countless academic and professional studies.

So, where does this leave the individual investor? And, more specifically, why is 2014 such a great year to get in the market?

At the end of the day, the only thing that truly matters for investors with long time horizons is just that: time.

Had you invested in the SPDR S&P 500 (NYSEMKT:SPY), the world's largest exchange traded fund with $174 billion in assets under management, at the height of the technology bubble and merely held on until today, you'd be up by 40%, assuming you automatically reinvested the dividends.

And the same can be said about the housing bubble. Even investors who poured everything into the broader market in the fourth quarter of 2007 would still be up more than 30% -- again, this is based on the performance of the SPDR S&P 500 and assumes reinvested dividends.

The point being, what matters is getting in and then staying put for as long as possible. As my colleague Morgan Housel is fond of saying, "The odds of experiencing stock market volatility are exactly 100%."

Good investors appreciate this and don't let short-term movement or market levels weigh on long-term returns. Those with less experience, meanwhile, do just the opposite.

The net result?

Assuming you have the luxury of a long time horizon, then you'd be wise to get into the market sooner rather than later, irrespective of the current market level or predictions of future performance.

The Motley Fool's top stock for 2014
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John Maxfield and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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