Will It Be Another Year of Happy Returns?

In his essay “Many Happy Returns,” Jim Parker, Vice President, DFA Australia Limited, reminds us that journalists refer to the Holiday Season as the “silly season.” Because many people take time off to spend the holidays with their family and friends, much of the working world grinds to a halt. Grappling with unreturned phone calls born of these extended vacations, personal finance writers often resort to what they call “evergreen pieces.” With a dearth of real news, they offer up “timeless” articles about the need to save more for retirement or how to dig out of holiday credit card debt. Of course, if they are lucky enough to track down an expert source, writers are likely to produce another January staple: a market outlook for the year ahead.

As Parker suggests, however, it can sometimes be more entertaining – and, in my mind, instructive – to look back on whether predictions for the year just ending rang true. Let’s think back. Last year at this time, Washington was in the grips of the so-called “fiscal cliff” standoff and dark storm clouds loomed on the horizon. Parker points out that even The Economist struck a skeptical tone about the 2013 economy with a columnist noting, “It is still hard to believe this will be a bumper year for returns.”

Of course, 2013 saw the S&P 500 gain 29.6% to post its largest annual jump in 16 years. The Dow had its biggest gain in 18 years. And many global equity markets followed suit. In Japan, the Nikkei 225 total return index was up more than 50%, its best yearly gain since 1972. And, in the UK, the FTSE 100 total return index reached a 13-year peak in May of 2013.

Now, record-setting returns from 2013 serve as the backdrop for new cautions. Chief among the worries is that stocks will flounder when the Fed begins tapering its monetary stimulus program. Individual investors would do well to simply ignore all the annual sound and fury about the market prospects and adhere to their own investment plans.  In fact, they should hold in mind Parker’s simple observation: “We don’t know what happens next. That’s why we diversify.”

If any of the often-quoted financial gurus had a crystal ball, they would be managing their portfolios from their own private island and have no interest in advising the rest of us. It’s also important to remember that most stock market analysts and prognosticators have their own interests that color their predictions.  The famous bond manager Bill Gross, for example, certainly needed investors to believe him when he said in November of 2012 that stocks were dead!

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