When the stock market is on a roll, is it the best time to invest in stock funds? With so many options, what are the best stock funds to invest money in 2014, 2015 and beyond?
Looking back from 2014, the best time to invest money in stock funds was five years ago when the economy and stock prices were in the dump. Since then, a bull market has rewarded investors with average annual rates of return of 20% and more. The best funds averaged 25% or more per year. At 20% per year, your money doubles in less than four years and at 25% in less than three.
The average investor needs to have money in stocks to achieve long-term growth. In the long term, they have returned around 10% per year vs. about 6% for bonds and 3% for safe investments in the liquid money market (often referred to as CASH). It is not about investing or not in equity funds. It is a question of how much of your portfolio should be allocated to stocks (often called stocks).
There is a big difference between the long-term average of 10% and the average return of 20% over the last five years. The difference is caused by LOW (bearish) markets that occur every few years and can wipe out half or more of the value of the stock market in less than two years, such as from late 2007 to early 2009. So 2009 was the best time to invest money in stock funds. Stocks were cheap and average investors were afraid to invest money (more money).
By 2014, the average investor had become more confident and finally began investing (more money) in stocks vs. bond funds. In other words, they were trying to make up for lost time, when stocks were no longer cheap. If another bear market takes hold in 2014 or 2015, not even the best stock funds will be immune to it. The best time to invest money in stock funds is when prices are dropping and investors are scared … not after five years of 20% average annual returns.
The best stock funds in a bull market (bull) tend to be those that invest money in smaller company growth stocks (small-cap growth stocks) that pay little in the form of dividends. These are the same funds that tend to get squashed in a bear market. If the market turns ugly in 2014, 2015 and beyond, the best stock funds will likely be those that have high-quality, large-company (large-cap) stocks that pay consistent dividends.
As bull markets age, they tend to lure investors back into the water. Just when you think it’s safe, it’s time to look back at the history of the stock market. The best time to invest money in stock funds is when stock prices are cheap and fear is the dominant emotion. When investors become complacent after a long uptrend, it is time to relax in the market. Your Best Stock Funds in the Next Recession: High-quality large-cap funds that pay consistent dividends, not growth funds.