The Best Way to Compound Your 2013 Gains

Email
    Text size

With the exceptional, unpredictable year that was 2013, we have a one-time opportunity to "mine" its insights... and make even more money in 2014.

The trick, as you'll see, is to block out the noise, stay invested, and focus on three key numbers...

No. 1
The S&P 500's Double-Digit Earnings Growth

2013 was one for the record books. The S&P 500 Index had its best year since the bull market of 1997, vaulting nearly 30%, while the Dow put in its best showing since 1995, spiking 26.5%. Both major indices finished the year at record highs, but the real winning market segment was the Nasdaq Composite. The tech-heavy index still is well below its "irrationally exuberant" all-time high, but its gains far outshined the other major indices in 2013, with a tremendous bull move of more than 38% during the year.

The stellar year in equities took place during a year fraught with all sorts of exogenous threats, concerns, and issues that stimulated the fear mechanism inside the lizard brains of many on Wall Street.

This year's biggest boogeyman was fear over the Federal Reserve and its decision to "taper" its massive and unprecedented $85 billion per month bond-buying program.

Though the Fed's next move was the biggest point of concern among market watchers, there were other threats that kept many otherwise intelligent investors from participating in the broad market gains.

Earlier in the year there was the debt ceiling debate, and then renewed debt default fears in European hot spots such as Cyprus, and then the China growth-rate slowdown. Then late in the year there was the government shutdown.

Each of these circumstances caused a lot of noise that bears seized upon.

What flew quietly under the radar was that the Dow Jones Industrial Average's aggregate earnings rose more than 16% from $901 to $1,045 in 2013.

This metric was really the only thing that truly mattered last year, and it was the fundamental force that moved the Dow Jones, the S&P 500, and the Nasdaq.

Although we won't get readings on Q4 earnings for a few more weeks, we did see very strong earnings for the third quarter.

Moreover, macroeconomic data - such as the upward revision to a relatively robust 4.1% Q3 growth in GDP - bodes well for both earnings and stock market performance in 2014.

So ignore the noise, focus on earnings, and stay invested until the earnings picture changes.

No. 2
The 10-Year Treasury Yield

For more than three decades - and with just a few exceptions - we witnessed a steady decline in the cost of borrowing. Short-term interest rates dropped from 15% in 1981 to their current level of near zero early last year.

Debt securities, such as Treasury bonds, which move in the inverse direction of interest rates, enjoyed a generation-long bull market, but in 2013 that party finally started to come to an end.

The Fed's mid-year taper hint, and the aggressive action traders took to move away from long-maturity Treasury debt, caused the value of many bonds to sink in 2013. For example, the iShares Barclays 20+ Yr Treasury Bond (ETF) (NYSEArca: TLT), an exchange-traded fund that tracks U.S. Treasury bonds with remaining maturities greater than 20 years, tumbled nearly 14% in 2013, a record outperformance of stocks over bonds.

Yet, because the bull market in bonds was so long, many investors had virtually forgotten that rates can rise and bond values can go down. As the economy improves, and as the Fed removes itself from the bond-buying equation via tapering, interest rates are likely to continue to move higher in 2014.

In short, when considering fixed incomes, remember rising rates are back in the mix and will impact your returns this upcoming year.

No. 3
The Price of Gold

Picking a bottom in a sector is something that traders and investors try to do for understandable reasons. It follows the old adage, buy low, sell high; If you can get in on a market sector while it's at the bottom, there's virtually no other way to go but up.

In 2013, many investors tried to pick the bottom in gold, and the result was they found themselves riding the yellow metal down, down, down. In fact, in 2013 gold prices plunged 28%, the biggest drop in 32 years and its first down year in 12 years.

Gold deserves a permanent place in most balanced portfolios, of course, but when it comes to a year when gold could move lower still, it's best to focus on total return.