Successful investing depends a lot on timing. You want your money to be in the right place at the right time in order to obtain the best results.
Take Japan for example. For years, the Tokyo market was a backwater for investors. Money just sloshed around and profits were few and far between. Then last year Prime Minister Shinzo Abe introduced a policy of aggressive economic reform and the Nikkei took off, gaining more than 50 per cent. Anyone who invested in Japanese funds did exceedingly well.
The profits on Wall Street weren’t quite as spectacular but gains of more than 30 per cent for Nasdaq and over 25 per cent for the S&P 500 were more than most investors expected.
So where should you be putting your money in 2014? Here’s a list of dos and don’ts for the coming year that may get you on the right track.
Don’t keep too much at home. The Toronto Stock Exchange lagged well behind its New York counterparts last year, in large part because of the dismal showing of the mining sector, particularly gold producers. The outlook for resources in the coming year isn’t much brighter. We aren’t likely to see such heavy losses but the chances of a huge upside turnaround aren’t very good either. Without that, the TSX will continue to sputter. We may beat last year’s advance of 9.6 per cent, but not by much. Best bet: Industrial stocks, such as auto parts makers, which will benefit from the lower dollar.
Do have some money in the U.S. The American economy appears to be gaining momentum, albeit on a two steps forward, one step back basis. After their strong performance last year, the major U.S. indexes are due for a correction and that could come at any time. When it does — and be assured, it will — take advantage of the retreat. Best bet: Buy sound U.S. blue-chip stocks or units of funds that invest in them.
Don’t buy hedged funds or ETFs. Hedging works in your favour when the Canadian dollar is rising. It diminishes your returns when the loonie is retreating, as it has been for the past year. Economists disagree about where our dollar will settle against the greenback but most believe there is more downside left. In that case, unhedged funds will work to your advantage by allowing you to capture the currency gain. Best bet: U.S.-based exchange-traded funds (ETFs) which not only are unhedged but generally have lower fees than their Canadian counterparts.
Do diversify globally. Japan wasn’t the only overseas market to do well last year. Surprisingly, the major European markets all scored double-digit gains and frontier markets — the new leading edge of investing — gained 25 per cent. So expand your horizons. Best bets: Conservative investors should stick with funds that invest in developed markets. If you’re more aggressive, put a little cash in an emerging markets fund. They had a bad year in 2013 and are due for a rebound.
Don’t overweight bonds. Everyone should own some bonds or bond funds for stability and protection against the effects of a 2008-style market crash. But don’t overdo it. The long bull market in bonds came to a screeching end last May and our DEX Universe Bond Index actually lost ground in 2013, the first time that’s happened in several years. This year may not be as bad, but it won’t be great either. Best bets: For conservative investors, short-term bonds or funds. More aggressive investors may be able to squeeze some extra profit out of high-yield bonds or funds.
Don’t buy gold. Worries about a double-dip recession, the printing of billions of dollars a month in new money by the Federal Reserve Board, and the Eurozone crisis should have given gold a boost in 2013. It didn’t. Now, with recession fears fading and quantitative easing tapering, there’s not much to propel the price of the precious metal. There will be a time for bullion again — this just isn’t it. Best bet: If you really feel you must own some gold, buy a few shares in a royalty company such as Franco-Nevada (TSX: FNV). They carry much less risk than the miners and the stocks have stood up better as a result.