It’s time for a look back on 2014. No, we’re not going to discuss Taylor Swift’s latest breakup or Kate Middleton’s newest baby bump. Instead, let’s take a look at this past year in terms of the markets, economy and overall financial atmosphere – and see what lessons we can apply to the year ahead.
Here are three of the biggest lessons 2014 has taught us about personal finance, and how they can help you be financially savvy in 2015.
1. Make Regular Contributions Each Month Rather Than Trying to “Time” the Market
When it comes to investment strategies, market timing is one of the worst ways to go. Unless you’re a professional, timing the market is largely a matter of guesswork, and the potential for big returns is severely counterbalanced by the real (and equally likely) potential for big losses.
2014 was a prime example of this. The markets were particularly volatile this year. The Dow Jones Industrial Average entered November looking like it might break the 18,000 mark and then plummeted almost 1,000 points in December. The DJIA 52-week range went from a 52-week low of 15,340 to a high of 17,991—and that didn’t happen in a straight line, but in a rollercoaster that has yet to stop undulating.
If you tried to play the market timing game in 2014, you found yourself alternating between crazy highs of excitement, lows of fearfulness and back again. That’s no way to invest — for your sanity, or for your future.
So what should you do instead? In 2015 and the years that follow, your mantra should be “dollar-cost averaging.” This investment technique is based not on wild predictions and perilous risks, but on strategically buying a certain amount of shares at preset intervals. Rather than making lump-sum stock purchases, you gradually work your way into share ownership, spreading out your cost and reducing your market risk.
Let’s imagine that in 2015, you invest $500 per month into the market. During months when the market is high, that $500 buys relatively fewer shares. When the market is low, that same $500 buys more shares. You have a systematized way to buying more when stocks are cheap and less when they’re expensive – while simultaneously reducing your overall risk. Also, consider DRIP’s, or stocks with dividend reinvestment programs.
2. Don't Lose Hope or Panic During a Recession
We’ve seen our fare share of financial troubles over the past year — and, in fact, over the past few decades. The sub-prime mortgage crisis may be freshest in your mind, but before that there was a stock market crash, a dot-com bubble burst and plenty of periods of mile-high inflation.
You’d think, in the midst of all this turmoil, that most investors would be suffering acutely. But according to the New York Times, stock prices have done so well over the past few decades we may as well call them the stock market’s “golden years.”
Let’s show you what we mean by the numbers. Home values in many parts of the nation, as well as the DJIA, have returned to pre-recession levels. On January 4, 2010 — almost exactly 5 years ago — the DJIA was at 10,618. Today it fluctuates between 60 to 70 percent higher. That means anyone who invested new capital in 2009 or 2010 has seen enormous gains.
The lesson? Don’t panic during a recession; it’s actually an opportunity.
3. Conversely, Don’t Get Too Excited About a Bull Market
How quickly we forget. 2014 started as a strong year, which had some investors thinking of the stock market as nothing more than a high-yield savings account. But the past month of falling stock prices has demonstrated that risk is still very real. We’re out of the recession, true, but no investor is ever really out of the woods.
The best investment strategy is one that keeps an eye on the long-term, focuses on historical averages, your own risk tolerance and your long-range personal goals rather than being swayed too far (one way or the other) by the natural fluctuations of the market. A wise investor is one who isn’t too scared or too enthusiastic over the current state of the market. Stay realistic about risk and focus on your long-term game plan, both in 2015 and beyond.
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