That 2013 was a great year for U.S. stocks is likely not a surprise to anybody who pays attention to the stock market. These facts, however, may be a surprise and offer some investment take-aways for 2014 and beyond.
1. U.S. stocks returned 33.45 percent as measured by the Vanguard Total Stock Index Fund ETF (VTI) with dividends reinvested. This is far better than the S&P 500 return of 29.60 percent and the Dow Jones Industrial Average of 26.50 percent, typically reported. Many in the financial services industry prefer the latter bogies, as part of the return of part of the market is much easier to beat. Don't fall for that illusion in 2014.
2. U.S. growth stocks bested value. According to Morningstar, growth stocks gained 33.34 percent while value grew 32.04 percent. Evidence points to value historically besting growth, but not every year.
3. Small and mid-cap stocks bested large cap. Morningstar data shows small cap gaining 37.91 percent, mid-cap gaining 36.29 percent, and large cap up 31.81 percent. Evidence also supports that smaller companies outperform large, which did happen in 2013. Remember both the value and the small cap factors are compensation for higher risk and not a free lunch.
4. The hottest performing industries in 2013 were consumer cyclical (+42.85 percent), financial services (+ 42.82 percent), healthcare (+42.68 percent), and industrials (+42.03 percent),. The worst were real estate (+1.75 percent) and utilities (+14.44 percent). Neither the best nor worst performing persisted over the past five years (except utilities), but rather showing a reversion to the mean and demonstrating the difficulty of predicting next year's hot industry.
5. Since the market bottom on March 9, 2009, U.S. stocks have gained 213.8 percent, as measured by the Vanguard Total Stock Market ETF (VTI). It's best to invest when pessimism is high, yet investors largely missed out on this surge. Only since January 2013 did net investor inflows into stock funds begin.
6. Stocks have performed reasonably well since the end of the go-go days when the paradigm still dictated that real estate couldn't decline, and when Lehman Brothers was still a Wall Street force. Since the pre-crash all-time market year-end close in 2007, U.S. stocks have gained 48.9 percent or 6.9 percent annually, outpacing bonds. Since that pre-crash high, the economy tanked, politicians became dysfunctional, the Mideast became more unstable, epic natural disasters became a semi-annual occurrence, and there was every reason in the world for stocks to perform badly. The market, however, loves to fool us.
How many people predicted these six surprising market
facts? To my knowledge, zero, which is
exactly my point. Investors continue to have an
addiction to prediction. We read market
commentary to predict what the market will do next and what sector rotation
will outperform in 2014. It's a lonely feeling
to accept uncertainty and a lack of control.
When it comes to investing, some things can be predicted and I'm rather proud of my predictions made a year ago. Many investors don't settle for market returns and instead pick stocks unsuccessfully. According the SigFig, only three of the 15 most widely held U.S. stocks bested the Vanguard Total Stock Index Fund.
Much as I am pleased with the market's gangbuster performance, I couldn't begin to explain it, and accepting that nobody else can either is the key to investing. As good as the financial markets have been over the past several years, a balanced portfolio sticking to an allocation performed even better, because it required investors to sell stocks in 2007, and buy stocks in 2008 and early 2009. That meant ignoring new paradigms and accepting uncertainty. A lonely, less traveled path to be sure, but a profitable one.