THE BLOG
12/30/2013 03:57 pm ET Updated Mar 01, 2014

Reflections on 2013 and Beyond

I learned a lot this past year from reading your comments, doing research for my blog posts and talking to investors all over the country. It certainly was an extraordinary year for the stock market. The S&P 500 index was up an astounding 30 percent year-to-date as 2013 came to a close. Investors who did not achieve those returns (or anything close to them) may feel depressed about the performance of their portfolios and confused about how to invest in 2014 and beyond. If you are in this category, you might find these reflections helpful.

1. Use the correct benchmark: It makes no sense to compare your returns to the S&P 500 index unless you invested in an index fund that tracks the returns of that index. A portfolio consisting of just large-cap stocks is too risky for most investors. Comparing your portfolio returns to the wrong benchmark is meaningless and misleading.

2. Don't worry about a market correction: If there is one thing we know for certain, it's that there will be both bull and bear markets. We can't predict when the current bull market will end, when the "correction" will begin, how long it will last or how severe it will be. You can't base a sound investment plan on the unsupported musings of "experts" who claim to have an ability to predict the future.

3. Bonds belong in your portfolio: In this environment of low interest rates, many believe bonds have no place in your portfolio. I disagree. High-quality, short-term bonds continue to play an important role: to cushion the effect of volatility and reduce overall risk. Those who eschew bonds justify their view by noting the current low yields. Investors who seek higher overall returns and can tolerate the risk should increase their exposure to stocks. While you can't reliably predict when a market correction will occur, you can be prepared to deal with it by including bonds in your portfolio.

4. Diversify across asset classes: The key to a successful investing plan is diversification. Unfortunately, this is a much-misunderstood concept that is often deployed (if at all) incorrectly. Appropriate diversification involves diversification across asset classes. They include large caps, small caps, large and small value stocks, international stocks and commodities. The bond portion of a well-diversified portfolio might include five-year Treasury notes. The best way to implement a diversified portfolio is by purchasing passively managed funds with low management fees. Actively managed funds should be avoided. Here is an excellent blog post on implementing a diversified portfolio, written by my colleague Larry Swedroe.

5. Focus on factors you can control: Many investors waste time and effort trying to get a handle on factors they can't control, like predicting the direction of the markets or trying to pick the next "hot" fund manager. Instead of engaging in this zero-sum game, focus on factors you can control: expenses, turnover, tax efficiency and capturing the returns of the global markets.

6. Fraud-proof your portfolio: The litigation releases issued by the Securities and Exchange Commission should be required reading for all investors. It's an unusual week when the SEC does not report an enforcement proceeding involving some form of illegal activity by brokers or advisors, often including outright fraud. The fraudulent schemes typically follow a familiar format: the promise of high returns with little or no risk. The promoter often makes no investments and uses clients' funds to support a lavish lifestyle. There is no excuse for not protecting your hard-earned money from this kind of chicanery. Never make a check out to a broker or advisor. Be sure your funds are held in an account in your name by a reputable independent custodian, such as Fidelity, Charles Schwab or TD Ameritrade. Verify your ability to access your accounts 24/7 on the Web page of the custodian. This simple precaution would have avoided most of the major Ponzi schemes, including Bernie Madoff's massive con.

With a little effort, and change of focus, you can maximize the possibility of a happy and prosperous new year, which is my sincere wish for all of you.

Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, The Smartest Sales Book You'll Ever Read, will be published March 3, 2014.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.