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.


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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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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