By ALAN KONDO, CLU, CFP
Happy New Year! Many investors were happy to put 2014 behind them, especially the last half of the year, which was characterized by dramatic market swings from record lows to record highs. What can we expect for 2015?
Conflicting Market Forces
The increased volatility in 2014 resulted from strong conflicting influences on the market. Globally, we saw conflicts on multiple fronts – Russia vs. Ukraine, Israel vs. Palestine, and continuing internal battles in Syria, Afghanistan and Iraq. The market responds to news, and went into a steep dive.
Then, the market came all the way back because of the strong U.S. economy – corporations are making good profits, real estate is rebounding strongly, and interest rates are still low.
On top of that, gas prices came down, putting more money in everyone’s pockets. In the short term, oil company stocks took a plunge. However, in the long-term, most economists feel that lower gas prices are a net stimulus to the economy. Already, automobile manufacturers, airlines and logistics companies (like UPS and FedEx) are performing much better.
What’s in Store for 2015?
In 2015, the U.S. economy should continue to do well, and the U.S. market should keep pace, perhaps even better than in 2014. Meanwhile, the governments in Europe and Asia have reduced their interest rates in order to stimulate their economies. This worked well for the U.S. in 2008, and it is already making a difference in the international markets.
The European Union will still have challenges, such as Greece’s economy, and attacks by Muslim extremists. China will still be dealing with long-term issues such as corruption and equality. However, every asset class has its day in the sun, and this may be the year that the international markets take off, similar to the U.S. market after March 2009.
Dividends Provide Stability
In a volatile market, dividends help to provide a stable anchor. Investors experienced this first-hand during the Great Recession of 2008 and 2009. While stock share prices swung wildly during this period, dividends tended to stay relatively stable. This was because the large, mature companies that offered dividends tended to pay out the same dividends no matter what was happening to their stock price. Consequently, investors who depended on the dividends for income came through the market bubble relatively unscathed.
Dividends are an important component of overall return. John Bogle, writing for IndexUniverse.com, pointed out that including reinvestment of dividends gave the Standard and Poors 500 (the index that contains 500 of the largest U.S. companies) an average return of 10.4% by the end of 2007. Without dividends, the return was only 6.1% compounded.
Diversification is important when it comes to dividends as well. A properly-diversified strategy (ie not putting all your money into just one dividend-paying mutual fund or stock) can pay you higher dividends as well as offer greater safety.
Keep Your Eyes on Long-Term Performance
The recent good performance of the U.S. market, and the poor performance internationally, have made some investors question why they have international holdings at all. This is because the out-performance of the U.S. market is welcome but temporary. Although the U.S. market is huge (49% of the global market), it is 33rd out of 45 countries in terms of 10-year performance ¹.
People tend to have short memories when it comes to investing. Between 2000 and 2009, the S&P 500 had a negative return. This is why those investors who only invested only in U.S. companies during those years refer to them as the “lost decade” ². However, in that same period, international investments had a positive return. If you had a globally-diversified portfolio, you would have fared much better.
It’s important not to lose sight of long-term performance because people are living much longer than before. It would not be unusual if you spent 25 to 30 years in retirement. When you are depending on an investment to help fund your retirement, you want to look at long-term performance, not what occurred in the last six months.
¹ Morningstar Direct 2014 MSCI Country Indexes
² Wall Street Journal 10/15/2009 “The Lost Decade of Stock Investing”
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The opinions expressed above are solely those of Kondo Wealth Advisors, LLC (626-449-7783, info@kondowealthadvisors.com), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, LLC nor its representatives provide legal, tax or accounting advice.