After a huge year for the market, coming up with the right investment strategies for 2014 might seem like an impossible task. Some factors are pointing toward another year of a roaring bull market, while others seem to suggest an imminent pullback. Yet as you try to navigate between fear and greed, keep in mind that the most likely outcome lies somewhere in between a bear-market plunge and an irrationally exuberant boom. With that in mind, these three investment strategies for 2014 could serve you well not just next year but well into the future.
1. Redefine value and growth stocks.
Traditional definitions of value and growth stocks have gotten turned on their head recently, and you need to recognize that in making choices about which stocks to own. On one hand, consumer stocks Kimberly-Clark (NYSE:KMB) and PepsiCo (NYSE:PEP) have dependable dividends and are in defensively oriented industries that often behave well in corrections. But enough investors have gravitated to these stocks to make them arguably overpriced, especially in light of somewhat limited growth prospects compared to companies in other industries.
On the other hand, tech stocks have traditionally been seen as having high-growth potential. But looking at tech giants Cisco Systems (NASDAQ:CSCO) and Intel (NASDAQ:INTC), both have earnings multiples far, far below the consumer giants listed above, yet both also pay dividend yields that are higher than Kimberly-Clark and PepsiCo. Moreover, if you think the two tech titans have any growth left in them at all, potential share-price appreciation could just be icing on the cake.
2. Look where low short-term rates can help investments.
The Federal Reserve has unambiguously signaled that no matter what it does with long-term rates through quantitative easing, it intends to keep short-term rates low until the economy gets quite a bit stronger. With deflation being a bigger risk than inflation, you should get a fair amount of lead time before having to worry that the Fed might pull the plug on easy monetary policy.
What that means is that investments that use leverage to borrow short-term to buy longer-term securities could succeed longer than some have feared. Mortgage REIT Annaly Capital (NYSE:NLY) and its peers might not produce strong price growth, but low rates could sustain its dividends to a greater extent than you'll see in a rising-rate environment. Similarly, closed-end funds that rely on cheap financing for their leverage could rebound from wide discounts and produce impressive returns -- at least until the Fed does start tightening.
3. Watch out-of-favor areas, but don't be too quick.
Amid record runs for the stock market, certain parts of the market remain out of style. Emerging markets have lagged behind stocks in the U.S., Europe, and Japan. Commodities have also dramatically underperformed the broader market. It's tempting to get into these areas while prices are low.
Bottom-fishing is always a tricky business, and it's easy to be too early to the value opportunity that falling markets present. Instead of betting big upfront on a bounce in these areas, keep some of your cash available for opportunistic purchases if these areas fall dramatically. That more conservative approach could help you avoid overcommitting in what could turn out to be the early stages of a longer-term correction for global markets broadly.
Be smart with your money
Investment strategies like these won't make you the maximum amount of money possible, especially if the bull market roars on. But as a way to combine some protection from downturns with participating in further gains, these investment strategies for 2014 have the benefit of reaching a happy medium that could produce solid returns no matter what the market brings next year.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Cisco Systems, Intel, Kimberly-Clark, and PepsiCo and owns shares of Intel and PepsiCo. 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.