Hiroshi Watanabe/Getty Images
Last year is now relegated to the history books, and the year-end stats for the financial markets are in.
The total return of the S&P 500 stock index, including dividends, was 1.38 percent, while bonds were flat, with the Barclay's Aggregate Bond index returning 0.55 percent. Crude oil and gasoline prices plummeted, and gold lost more luster.
The start of a new year is the perfect time to reflect on the lessons of what we could have done better, so with that in mind, here are three strategies to help you better protect your financial future in the coming year.
1. Take a long-term perspective.
One year is a short period in the world of investing. Still, the incredibly flat year for stocks and bonds doesn't seem so boring in even shorter terms. Headlines read "Stocks plunge on another wild day on Wall Street" and "Stocks Surge; Dow Exits Correction Territory." This, combined with media stories on high volatility for 2015, seemed to make investing nerve-wracking. My advice: Don't buy all financial headlines.
I decided to fact-check these volatility headlines, so I had Robert Waid, managing director of Wilshire Analytics, run some numbers for me. We discovered that the daily volatility of the total U.S. stock market in 2015 (measured by the Wilshire Total Market 5000 Index) was lower than the average volatility of the previous 35 years. To be precise, the daily standard deviation in 2015 was 0.96 percent, vs. an average of 1.08 percent since 1980. The myth of market volatility continues.
These headlines are enough to make anyone crazy. Ignoring them and taking a long-term perspective will likely help you worry less.
2. Be wary of predictions.
No one knows the future. I couldn't find many experts who a year ago predicted flat financial markets for 2015. Even forecasting the economy is tough. I went back to the beginning of 2015 to look at the forecasts of our nation's top economists. As a group, they again predicted rising rates, with the 10-year Treasury bond yield edging up from 2.17 percent to 2.87 percent by year's end, which would have been bad for bond prices. Bond yields barely budged, ending the year at 2.27 percent. For oil, the consensus predicted $54.74 a barrel for a closing price, with the lowest forecast of all 70 economists coming in at $40. No one saw the oil glut coming and crude closing at $37.07.
3. Join the indexing bandwagon.
According to Chicago-based research company Morningstar, 80 percent of mutual funds investing in large-company U.S. stocks failed to beat a low-cost S&P 500 index fund. Other studies also indicate active (stock picking) funds continue to fall short of index funds. Thus, money continues to pour out of active funds and into index funds. According to the Bogle Financial Markets Research Center, through November, $80 billion flowed into U.S. stock index funds, while $163 billion flowed out of actively managed U.S. stock funds. U.S. stock index funds now have over 38 percent of assets of total U.S. stock funds.
See also: Should you exit the stock market?
Normally, I don't recommend following the herd and investing in anything that's popular. In this case, however, my research reveals that indexing can't become too big. I've been indexing for a quarter century and can tell you that lower fees result in higher returns and that the power of compounding those higher returns creates financial freedom.
So what do I think will happen in 2016? Headlines will read "Stocks Surge" and "Stocks Plunge" and "Markets Volatile." Expert predictions will mostly be wrong. Most active funds will underperform a low-cost broad index fund.
Granted, these predictions aren't as emotionally appealing as a precise one, like "stocks will return 11 percent." But if you combine my predictions with the three lessons above, your portfolio will likely be more prosperous in 2016 and beyond.
Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.
Also of Interest
- Do's and don'ts of finance
- Want to drop pounds fast? Try these tactics
- Drive Safe. Drive Smart. Take our award-winning Smart Driver course today!
Join AARP Today — Receive access to exclusive information, benefits and discounts