Invest in 2015 with The Tried and True

Plunging oil prices. Geopolitical uncertainty. Large-cap mutual funds down for the year. The end of quantitative easing. Yet a solid performance turned in by corporations in general. How does an investor looking out over the new year make heads or tails of all this? More simply than you might think.

Looking back at 2014

This past year was another positive one for the U.S. equity market, following an incredibly strong 2013. The S&P 500 surpassed index-level milestones, posted new highs in earnings and cash balances, and sustained record-high profit margins. Gains were posted despite some major global upheavals and developments such as heightened Ukraine-Russia tensions, the rise of ISIS in the Middle East, a global economic slowdown led by Europe and China, and plunging of oil prices (down 50 percent from the June peak), to name a few.

This storm of global macro and geopolitical uncertainty versus improving economic and corporate fundamentals in the U.S. was challenging for some investors to navigate, as evidenced by the struggles of active fund managers last year. Only 16 pecent of large-cap mutual funds outperformed the S&P 500 index in 2014. That is the lowest share since 1997. Among other things, many mutual funds were hampered last year by high allocations to the energy sector.

Oil prices and their impact

The colossal fall in oil prices over the past six months has certainly wreaked havoc on energy stocks, but what is the impact on the rest of the economy? Most economists predict that the consumer benefit from lower energy costs will more than offset any headwinds for the energy sector of the economy. For example, economists’ estimates suggest that recent declines in oil prices will translate into an at-the-pump savings of $800 per year per American motorist. This is sufficient to boost U.S. gross domestic product (GDP) by three- to four-tenths of a percentage point.

Booming U.S. economy

The U.S. economy is stronger than it has been in several years. Corporate balance sheets are leaner and more efficient than they have been in decades. Interest rates, even if they rise (as they almost certainly will), will continue to hover near historical lows. The average American has less debt, is right side up on their mortgage and has a growing risk appetite fueled by years of pent-up demand. Blended together, this is a growth cocktail that should produce higher corporate earnings more than able to offset any stock market concerns from higher rates.

There is little sign of irrational exuberance in the stock market or in the economy; in fact, many investors are skeptical. This skepticism is a sign of a healthy market. When everyone thinks the stock market can do nothing but climb and all the skeptics have disappeared, that’s when I begin to worry. While consumer sentiment has rebounded from its 2009 low, it is still well below the levels reached in 2007 and 2000.

History guides investors

All this skepticism has led investors to underweight equities in their portfolios while stocks continue to outperform most other asset classes. Before I go one word further, let me emphasize: Every investor should, first and foremost, have a portfolio that passes their sleep test. If your investments are keeping you awake at night, it’s time to make a change. If you’re concerned about risk, you should ratchet it down. Your wealth should enhance your life, not cause stress and sleepless nights.

Now, that said, investors should also do their best to overcome their skepticism about investing in U.S. companies. A disciplined investment approach using equities within a diversified portfolio is the best way to achieve long-term financial goals. You don’t have to take my word on it. Take the proof of history.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors LLC. Her column on women, families and building wealth appears each Saturday in The Tennessean.