What to Invest In-2014

By in Bond, Investing, Stocks | 17 comments

How to Invest in 2014?

“Everything is worth what its purchaser will pay for it.” Publilius Syrus (1st century BC)

2014 is very different than previous years. What will investor’s be willing to pay for stocks and bonds in 2014? The stock market is up over 20%, but not terribly overvalued (by historical standards). Certainly, the market is not at the lofty valuations of the late 1990’s.

Interest rates are at a generational low. I’m getting a bit long in the tooth, and I’ve never seen interest rates this low.

Unemployment is high, but dropping bit by bit.

So, what is an investor to do? The pundits don’t agree on the best course of action today. And, after doing a complete portfolio evaluation I’m answering this question for my own portfolio; “What to Invest in in 2014”?

Investing Issues in 2014

The most popular investments consist of stocks, bonds, and cash. Some investors like to diversify with commodities and real estate investments as well but today we’ll concentrate on the big three.

Here’s the problem, historically, cash paid the lowest returns with the lowest price volatility. You could expect an average 2 to 3% return on your savings account during the last 70 or 80 years. Stocks paid the highest return with great swings in value. Over the last 80 years, stocks averaged about 9% per year. And bonds were in the middle with a historical return in the range of 5% per year.

Historical Returns of Cash, Bonds, and Stocks

Historical Returns of Cash, Bonds, and Stocks


But the returns of stocks and bonds are anything but steady. It’s not unusual for stocks to lose 20 or 30% in a bad year and bonds had negative returns in 2013. To further confuse the scenario, in most of the first decade of the new millennium, bonds outperformed stocks.

In fact, as interest rates rise, investors holding existing bonds and bond funds will suffer loses in their bond portfolio. The reason for this inverse relationship is simple, if an existing bond is paying 1.5% and market rates rise to 2%, no investor will pay full price for a bond paying 1.5% when she can get a new bond paying 2%. Thus, the old bond holders will have to sell their bonds at a discount in order to remain competitive in the rising interest rate environment.

With bond and cash yields in the low single digits, and the economy improving year over year, investor’s piled into stocks, driving prices up.

Investing Questions for 2014

Will the stock bull market continue?

With inflation at rock bottom, interest rates in the basement, stocks will more than likely continue to advance. Investors are left with few higher yield alternatives for their investment cash. It’s unlikely stock market returns will be in the high 20% range next year, but their returns will more than likely be positive.

Will interest rates rise?

The ten year Treasury Note interest rate is 3%. That means you buy a ten year Treasury note and you can expect a 3% annual rate of return. Looking back on historical averages, that’s on par with the historical return on a plain savings account. Not very enticing.

With interest rates so low, it’s likely they will increase. But when and by how much remains to be seen. It’s tough to make a prediction on future interest rates.

If interest rates trend upward, investors will have a chance at higher money market and bond yields.

Investing Answers for 2014

Cash Alternatives

In my recent US News and World Report article, “The Best New Savings Vehicle You’ve Never Heard of“,  I wrote about Floating Rate Notes. These newest US Treasury offerings have a floating interest rate which is tied to the 13 week treasury bill rate.

What does this mean for investors?

Investors in Floating Rate Notes will enjoy increasing returns when the short term interest rates rise. Although rates are low now, buy these safe government notes and when interest rates rise, so will your returns. (Conversely, when interest rates decline, so will your returns).

Bond Alternatives

This is a tough category. As stated above, when interest rates rise, the returns on bonds fall. If you’re invested in a bond fund, there is no end date, so you can’t hold the bond until maturity and hope to get back the bond’s face value. I know this may be controversial, but all but the shortest term bond funds are likely to have a negative return in 2014, if interest rates rise. Funds holding longer term bonds with greater durations will fall mare than shorter term bond funds.

If you have a large portfolio, consider investing in individual short term corporate bonds. For a 2 year A rated Corporate bond, expect to earn 1.62% annualized yield. Go out  a bit further out and invest in a 5 year, higher rated AAA corporate bond for a 2.13% yield.


Bond Yields-December 29, 2013

Bond Yields-December 29, 2013


This bond yield and return chart plots expected returns for a variety of time periods for various types of bonds. Notice that higher quality bonds pay lower rates of return than lower rated bonds. Also, shorter term bonds offer lower returns than longer term bonds (holding other variables constant).

Although interest rates are low right now, another government security, I bonds offer a yield tied to the inflation rate. When inflation increases, so will your investment return. My family invests the maximum allowed each year and although the rates are currently low, your principal purchasing power is protected if inflation kicks in.

Stock Alternatives

This is a difficult category. In general, it’s tough to properly “time the market”. Research has proven time and again that jumping in and out of the market reduces your overall returns.

Review your asset allocation and make sure it fits in with your current stage in life and risk tolerance. Continue dollar cost averaging into diversified index funds. Stay the course, and be aware of the properties of stocks. They are the most volatile asset class meaning their returns jump around from year to year.

Most professionals suggest stocks will have a positive return this year. The reason? The economy continues to improve and there aren’t many investment alternatives to stocks, with such low interest rates.

Remember, don’t have any money in the stock market you expect to need in the next 5 years.

Don’t forget that investing is a marathon when you consider “What to Invest In in 2014“. Over the short term, anything can happen. Over the long haul, money invested in the financial markets compounds.

Readers, what are your investing plans for 2014?

image credit; Bond yields_Fidelity.com


  1. Good advice Barb! Stay invested and diversify your assets! Simple rule I follow!


    December 30, 2013

  2. Can you compare FRN and Ibonds? Which one is better?


    December 30, 2013

  3. I struggle to find any investment that looks appealing right now. I think all the conventional places to put savings stink. We are looking to get into rental property in our area, but the market seems to be tipping downward, and we don’t want to buy at or near the peak. Frankly, I’m stymied.

    Kurt @ Money Counselor

    December 30, 2013

  4. @Joe, Good question. Both Floating Rate Notes (FRN) and I Bonds are different types of investments with differing qualities. The I bonds return is tied to the inflation rate and adjusted every six months based upon the CPI inflation rate. Floating rate notes are tied to the 13 week return of treasury notes and the interest rate varies quarterly. If inflation goes up, i bonds will give you a greater return and protect your purchasing power. If interest rates rise (and inflation doesn’t), you’ll get a greater return with FRN. I own I bonds and intend to purchase FRN at the end of the month when they are available.

    Barbara Friedberg

    December 30, 2013

  5. @Kurt-I agree that it’s slim pickings in the investment world right now. If you have some extra cash, I wouldn’t worry about holding on to it in a CD of other short term savings account. Although you won’t be making much of a return, you’ll also be ready when better investing opportunities arise.
    What area of the country do you live in?
    Here in Northern CA the property values have skyrocketed over the last 2 years!

    Barbara Friedberg

    December 30, 2013

  6. Well, I’m planning to invest on either mutual funds or stocks this coming year. But I think I’m going for the latter because I find it more challenging to invest in the stock market.

    Mark Ross

    December 31, 2013

  7. I try and think long term. When I research a fund, whether it’s a stock or mutual fund, I look at the 5 and 10 year picture. Has the fund been incredibly volatile or steadily grown? 2014 is the year of more investments for me!

    Little House

    December 31, 2013

  8. @Little House-Very wise to take a long term approach. That’s the best approach to take with investing!

    Barbara Friedberg

    December 31, 2013

  9. We don’t plan to change our asset allocation in 2014. Since the stock market had such a large gain in 2013, we will be purchasing the max allowed of i-bonds and will look into floating rate notes to increase our income holdings.

    Bryce @ Save and Conquer

    January 1, 2014

  10. My goal this year is to diversify my portfolio. Years ago, all I did was establish a savings account to save money. Last year I started to invest in stocks. I was to expand on those investments this year and add bonds to my investment portfolio.


    January 3, 2014

    • Hi Jenny, Step by step, you’re on the path to wealth! After all, you need to save first before you can invest.

      Barbara Friedberg

      January 4, 2014

  11. Very interesting article, the floating note treasury bill has really got me thinking. I’ve think stocks will continue to rise at a slower pace and fall when interest rates rise as the FED engages in Tapering. Great post, so many things to think about.

  12. Hi Nick, Although it’s really tough to predict the future (dare I say Impossible), I agree with your prediction. With interest rates so low, and stocks only moderately over valued, I too expect at positive stock market return in 2014. But, that said, who knows?

    Barbara Friedberg

    January 5, 2014

  13. I agree stocks are moderately overvalued which is why I’m now investing in Dividend aristocrats which have a history of increasing dividends over the years, the dividend income should offer safety is the stock market starts to decline. What is your view on Dividend Aristocrats?

  14. @Nick-I prefer investing in diversified index funds as the most expedient way to invest. You receive a market return with little time and effort. If you are choosing individual stocks, regardless of their dividend history, it’s still prudent to research the financials, growth prospects, and market environment of the company. Even if companies have a history of increasing dividends, the firm still needs growth drivers for the future in order to continue the dividend growth. Investors also need broad diversification, so choosing a portfolio of at least 20-25 individual stocks in a variety of industries is very important.

    Barbara Friedberg

    January 11, 2014

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