Happy New Year to you! As we kick off 2014, I want to start by looking back at last year. That’s the best way to move forward, right? There was an article in the Wall Street Journal last week that declared “Boring Investors” as the big winners of 2013.
What is a boring investor?
I wouldn’t personally call it boring, but they defined it as people who simply bought and held a “plain vanilla” portfolio of stocks. Those were the winners of 2013—NOT the investors who employed risky, complex strategies or who tried to time the market or chase high returns in emerging markets or hedge funds. Simply owning an S&P 500 Index fund returned a whopping 32% with dividends last year. That’s incredible! By contrast, emerging markets, commodities and hedge funds all lagged those results significantly.
So what’s the takeaway as we move into 2014?
The lesson is that you don’t have to be a hotshot to make money in the stock market. In fact, overconfidence can be a complete liability. The flip side is that so many people don’t invest because they feel they don’t know enough and are intimidated. You don’t have to have the fanciest, most expensive, international managers and you don’t have to know the ins and outs of every move the market makes. You just need to get in the game. Because here’s the thing: Those so called “boring” investors were still INVESTORS. According to Morningstar, the average mutual fund focusing on large-company stocks was up 32% in 2013, and the average fund focusing on small company stocks was up 38% for the year. That’s a stunning one-year return for U.S. equities. Will every year be like that? No. But if you kept your money in a savings account last year instead of the stock market, you’d have ended up down after inflation. The interest rate on a savings account was a pathetic 0.1% last year. ZERO POINT ONE percent! That’s basically zero, and no one thinks we’re going to see that change any time soon.
So 2014’s savings shouldn’t be in a savings account?
Exactly. By all means, everyone should have an emergency fund in their savings account, but if you’re not investing in the stock market, you simply cannot afford another year of sitting on the sidelines. This is the year to get started. The best way to dip your toe in is with dollar-cost averaging.
Remind us what dollar-cost averaging is again?
Sure! Dollar-cost averaging is when you invest a set amount on a regular schedule regardless of the share price. That means you’re consistently buying into the market and not trying to time the highs and lows of stock prices. It’s a disciplined and patient approach. The best part is that so many mutual funds have minimum investments of just $50 a month—and mutual funds offer instant diversification with a basket of stocks.
Forget the diet and the gym and resolve to get your finances in shape! That $10,000 you had in savings for the year is worth $10,100. Woo hoo! You made $100! I’m not knocking the $10,000 you kept in savings. That’s great! But if you’d invested the money in the S&P instead of keeping it at the bank, it would be $13,200. That’s $3,100 more—a down payment on a car or a swank vacation or just a significant addition to your long-term retirement goals.
Mellody is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.