Stock Investing: Best Investment Strategy for 2014 and Beyond

Stock investing is the growth engine of your investment portfolio, but in 2014 and beyond your best investment strategy could be to cut your investment exposure in stocks (also called equities) and stock funds (also called equity funds). Face it: equities and some stock funds have run up 150% in the past four to five years and this run could be about over. Why invest money here (more money) now?

Stock investing has been very profitable in the past few years. The truth of the matter is that stocks and stock funds have been the best investment for the average investor for questionable reasons. In this extremely low interest rate environment, who wants to invest money in bonds, bond funds or any other interest-paying investment vehicle? In the world of stock investing, investors want to see a growing economy, rising corporate profits and growth in corporate sales. In recent years corporate profits have been a product of cost cutting vs. increasing sales. Corporate America has been reluctant to hire employees.

Our government has, by design, kept interest rates artificially low to stimulate the economy and bring unemployment down. They’ve done this by BUYING longer-term debt securities, like their own Treasury securities… to the tune of $85 billion a month in 2013. This made stock investing the best investment game in town, and kept interest rates low. In 2014, many economists expect that this will unwind and interest rates are likely to increase. At that point stock investing could be a whole new ball game. Equities might not be your best investment.

Invest money in stocks or stock funds if you believe that our government’s efforts will create a new wave of growth in the economy, in jobs, and in corporate sales. Do not rush out to invest money (more money) if you think higher interest rates will follow and choke economic growth. Remember, higher interest rates can hurt sales as purchases bought on credit (cars, homes, credit card purchases in general) decline. Higher rates can also hurt corporate profits because they increase the cost of borrowing money. Corporations borrow a LOT of money.

That’s one view of stocks for 2014 and beyond, based on a fundamental view of stock investing. The other approach is the technical viewpoint. With the stock market on a four to five year roll, near all-time highs and up 150%… it could be due for a correction. If you invest money in stocks or stock funds now, you could be arriving at the party late. This is not rocket science, but consider 2000-2002, and 2007-2009. These were brutal bear markets that handed investors losses in the neighborhood of 50%. Only after these bear markets ended were stock funds the best investment for the average investor (for about 5 years).

Well, it’s been about 5 years now since the recession (financial crisis) was officially put to bed. High unemployment is still with us and economic activity and growth is nothing to write home about. The real dilemma for investors in 2014 and beyond is that there appears to be few (if any) good or best investment prospects on the horizon. The only cheap asset class around is CASH. To earn even 1% on a CD you must shop around. Why invest money in a money market fund when they pay virtually nothing in return?

When investors look at the apparent lack of investment opportunities out there and see equities going up they tend to want to jump on the band wagon and invest money in stocks and equity funds. History tells us that stock investing in an inflated market can be dangerous to your financial health. Sometimes your best investment is a safe and boring one like a short-term CD, savings account or money market fund. In 2014 your best investment strategy may be to cut back on stock investing and opt for more safety.

Best Stock Funds to Make Money Investing in a Bad Stock Market

Anyone can make money investing in stocks or stock (equity) funds in a good stock market – but few make money investing in a bad market. If 2014 and/or 2015 turn ugly, there’s a little “secret” about the best stock funds you should know if you are into stock investing.

I competed in the last CNBC international stock investing contest and beat 99.9% of the competition. This was in late 2011, and the field of competition included about half a million investment portfolios (trying to win the $1 million first prize). The market took a hit, and that’s what I was betting on… so I loaded up on the best stock funds available at the time. Secret: You don’t make money investing in equities (stocks) by trying to pick winners in a bad market. You make money by betting against the market. And that’s what I did, taking advantage of all the financial leverage the contest would allow. Most investors do not know that you can bet on the downside.

With the market UP about 150% since the lows of 2009, the years 2014 and 2015 could spell trouble for stock investing and investors who think they can pick winners. In a BEAR market the VAST MAJORITY of stocks fall and the biggest winners of yesterday become today’s big losers. Period. The good news is that these days the process of betting against the market is simpler than ever. All you need is a brokerage account with a major discount broker. Then the best stock funds to make money investing in stocks in a bad market are available to you at a cost of about $10 a trade.

These best stock funds are called “inverse equity” funds. Simply stated, they are index funds called ETFs (exchange traded funds) and they trade just like any other shares do. To get your feet wet, I’ll give you an example. The symbol SDS is a bet that the market (as measured by the S&P 500 Index, which represents the 500 biggest, best known corporations in America) will FALL in value. If the stock market (the S&P 500 INDEX) falls 1% in a day, SDS should go UP 2% (inverse leverage of 2 to 1). If the market in general falls 50% in 2014 and/or 2015, the price of SDS should go UP 100% (a double).

During the great DEPRESSION of the 1930s, some investors got rich as the market unraveled. In 2000-2002 and again in 2007-2009, the market tanked and some folks got rich by “short selling” or taking a “short position”… by betting against the market. Today, taking a short position is easier than ever before… and even the average investor can do it with inverse equity ETFs. You simply buy them and hope the stock market falls. Then, you try to time it so you sell them for a tidy profit if it does. In the old days the process of selling short was a bit more involved.

Most of the time stock investing is lucrative, but every few years it gets ugly. You will never make money investing in stocks on a consistent basis. No one does, and not even the best stock funds in search of the best companies to own come close… because they are designed to bet on the upside. When the tide for equities goes out, at least 90% of stocks traded are losers. If you want to beat the stock market you’ve got to know when to hold them and know when to fold them. If you really want to make money investing in stocks you’ve also got to know when to short them.

These best stock funds for a bad market (inverse equity funds) are NOT for average investors who are investing money for retirement passively. These are only the best stock funds for those who want to play the stock market game actively (with simplicity) to do the best that they can. Stock investing is a big part of the game if you really want to put your money to work and make it grow. If you can make money investing in stocks in the bad years you’ll be WAY AHEAD of the game. But it will require some time and attention on an ongoing basis.

Looking at 2014 and 2015, I think that the party may be over. If you are heavily into stock investing vs. bonds and safe investments, I suggest you take some money off the table. If you want to be more aggressive and try to make money investing in stocks in what could be a bad market I suggest giving inverse equity funds a try. The financial leverage they offer is 2 or 3 to one. You can get more leverage than that with stock options called PUTS, but these can be much riskier… because here you pay a premium for time and eventually they EXPIRE on a given date and can become worthless.

What I am calling the best stock funds for a bad stock market do not expire. They are simply stock index funds on steroids that move opposite in price to the stock market in general. I suggest you start by experimenting with SDS before you try to make money investing by going “short” part of your investment strategy for 2014 and beyond. If you find that you are not comfortable playing the short side – you can always sell and get out.