The Best Investment Advice for 2014
On Monday, we covered some of the worst investment ideas in Forbes' 2014 Investment Guide. Among these were forming a family limited partnership, plunking for an annuity, ignoring high mutual fund expenses, buying (overpriced) farmland, holding off on Treasury Inflation-Protected Securities (TIPS), and increasing your stock allocation after retirement (regardless of what it is).
Mixed in with these clunkers, however, were a number of sensible pieces of advice that might well lead to higher returns in 2014. Here are the best:
- Look for undiscovered stocks with market caps between $1 billion and $10 billion. Mid-cap stocks are the sweet spot in the market - and yet so few investors seem to realize it. Small-cap stocks are risky and often get run out of business by larger competitors with huge advantages of scale. Large-cap stocks are victims of their own success; they become too big to compound their earnings at the same rate they did when they were fillies.Mid-size companies have already cleared the important early hurdles and are often more adaptable than the stodgy big fish.
- Diversify globally to boost your portfolio's risk-adjusted performance. Even in our highly globalized economy, the majority of investors still don't understand that diversifying into foreign markets actually reducesyour portfolio risk while increasing returns. Why? Because international markets are not perfectly correlated with our domestic markets. In technical terms, they often zig when ours zags.A good example is Japan. It has posted a negative return for the past 24 years. (Now that's a secular bear market.) However, stocks there are cheap and beginning to climb again. Adding some Japanese stocks to your portfolio - like Nidec Corp. (NYSE: NJ) and Sony Corp. (NYSE: SNE) - could prove a very smart move in 2014.
- When company insiders buy, you should too. If you don't think the smart money on Wall Street is watching what corporate officers and directors are doing with their own shares, you don't know the smart money.Insiders have access to all sorts of material, nonpublic information about their company's business prospects. They know the direction of sales since the last quarterly report; new products and services in development; the status of pending litigation; whether the company has gained or lost any major customers; and so on.This gives them an unfair advantage when they go into the market to trade. So they must file a Form 4 with the SEC detailing how many shares they bought or sold at what price and on what date. You should know what the insiders are doing - especially when they are buying - and follow their lead.
- Don't try to reinvent the wheel. Instead, intelligently and efficiently apply what is already well known. This small gem from Gary Shilling is advice that should be heeded every year.Novice investors (and plenty of those who should know better) have a strong tendency to gravitate toward systems and styles of investing that are new and hot. That can work for a while but has a tendency to end badly.Nor does it make sense to follow some pundit's well-articulated forecasts about the economy or the stock market. I can't say it often enough: Successful investing is not about following the right predictions. It's about following the right principles.
And we will continue to discuss the best and most important investing principles here in 2014. Enjoy the holidays!