NEW YORK (MainStreet) Equities remain an attractive investment as the Dow continues to rise and could top 19,000 easily in 2014, experts predict.
Equities outperformed bonds in 2013, as the economy showed strong signs of improvement and consumers felt more confident. The Dow Jones Industrial Average, an index comprised of 30 companies, is a benchmark for measuring the performance of investors' portfolios. The Dow will reach 19,700 by the end of 2014 since equities should continue to gain, said Matthew Tuttle, CEO of Tuttle Tactical Management, a Stamford, Conn. investment firm.
"With interest rates continuing to be low, there is no other place for investors to put money other than stocks," he said. "If you add in an economy that is on an uptrend and there are no possible surprises out of left field, then you have an environment that is very positive for stocks."
Equities could bring returns as high as 15% in 2014, allowing the Dow to reach 18,700, said Bill DeShurko, a portfolio manager on Covestor and president of 401 Advisor, an investment advisory based in Centreville, Ohio.
Investors need to be patient since many of the gains may not occur until the third or fourth quarter, he said.
"I think most of the gains will come late in the year after a year of modest earnings growth," DeShurko said. "However, optimism for accelerated gains in 2015 will power the market towards the end of the year, which would make 2015 the more likely candidate to be a bubble bursting year."
Stocks which pay dividends are one of the best options for an investor's retirement portfolio, he said.
"Dividends are the only way to be sure of a check for life," DeShurko said. "Any other strategy relies on capital gains, but most analysis ignores the effects of capital losses. The trick is to not be too greedy by stretching for too high of yields or lose focus and get caught up on growth arguments. Dividend sustainability and growth is all about cash flow."
Ken Moraif, a senior advisor at Money Matters, a Plano, Texas wealth management firm, is confident that the Dow will reach 18,000 in 2014 because the economy has rebounded.
"I don't see any signs that there is a recession coming," he said. "Most of the signs from the economy look positive and the direction is toward growth."
Investors should allocate more funds toward equities, Moraif says, even though he believes the stock market is due for a correction and the Dow will dip below 15,000 before it reaches 18,000.
"The market ran very fast last year," Moraif said. "There was a lot of excitement and exuberance, but the economic data was not as great as those expectations that were built in and that will precipitate a correction. Still, the overall trend will be upward, because the economy is improving."
Since Europe is emerging from its recession, it is a good market for investors to allocate their funds, he said.
Yale Bock, a portfolio manager on Covestor and president of YH&C Investments, an investment adviser based in Las Vegas, is more cautious and believes the Dow will reach 17,100 in 2014.
Investors who own mutual funds in indexes such as the Dow or S&P 500 should see a "modest appreciation" of 5% to 6% in their portfolio this year, he said.
"People need to do their homework about what they own and why since each circumstance is different," Bock said. "It depends on the specific equities which are owned. The closer to retirement, the more you want to be in assets which don't face possible large capital losses, especially if you are depending on that capital to pay living expenses."
While the stock market remains volatile, the Dow is likely to reach 20,000 by 2018, said Seth Masters, chief investment officer, Bernstein Global Wealth Management, a New York firm.
While investors will not be able to capture the 30% gains of 2013, stocks should still provide a 7% to 8% annual rate of return in 2014, he said.
"The capital markets and the economy have been doing a little better than expected," Masters said.
Even if growth in the market remains lackluster and only produces gains of 7% to 8% over the next several years, the Dow will still reach 20,000, he said.
"Stocks are still attractive investment and they help to meet most people's investment goals if they stick with it," Masters said. "The valuations are still reasonable."
The stock market has risen by 170% since March 2009, but most investors divested their stocks and turned to bonds and missed a great bull market, Masters said. Stocks will outperform bonds by 90% over the next five years, he said.
"People have forgotten that the essence of investing is having a longer term view and to stick with that view as opposed to overreacting to near term wiggles," he said. "The path of the market has been up since 2009."
While investors should be very selective in choosing stocks, consumer discretionary stocks are a good option, Masters said. Target date funds and target risk funds are also good assets to purchase since they help balance risk.
"Investors overreact and tend to assume the future will look like the past," he said. "The fundamentals are more important to predicting the future. Equities are volatile. People should have been buying stocks from 2009 to 2012 instead of selling them. Investors need to learn the right lesson from these kinds of swings."
Most investors do not have enough equities in their current portfolio, said Nick Ventura, CEO of Ventura Wealth Management, a Ewing, N.J. firm.
"Equities are generally 'under owned,' " he said. "For the past five years, investors have plowed money into bond funds. However, that trend began to unwind in the face of rising interest rates in 2013."
Earnings for companies are likely to continue to rise and can "translate into higher equity values," Ventura said.
"We believe earnings can rise 5 to 7% in 2014," he said. "Add to that a decent dividend yield in equities and you come away with a compelling case for equity ownership. We are fairly certain that 2014 will be more volatile than 2013 which had the lowest year of volatility since 1995."
Written by Ellen Chang for MainStreet