Why 2013 was the worst time to begin investing

The gains were fantastic, but it won’t always be that easy.

a woman

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Enormous gains were recognised by investors last year, as the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) soared more than 15 per cent, not to mention the dividend distributions that also added an additional four or five per cent. The gains recognised far exceeded those that would otherwise have been realised from bonds or interest payments from term deposits.

The gains were widespread. Some of Australia’s most widely-held stocks, such as Commonwealth Bank of Australia (ASX: CBA) and it’s banking peers, grocery behemoths Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES), or biopharmaceutical giant CSL Limited (ASX: CSL) all delivered fantastic gains and paid healthy dividends too. The strong performances of these stocks also acted as a positive force on many other companies within the ASX 200.

It is fantastic that so many Australians managed to recognise such strong gains for the year, and by all means, the gains could well continue in 2014 with some analysts forecasting the index to climb as high as 6000 points over the next 12 months.

However, 2013 may actually have been one of the worst times for people to begin investing. The gains were almost too easily recognised, in part due to the indirect effects of the US Federal Reserve’s bond-buying stimulus program which fuelled global equity markets.

As a result, beginner investors weren’t exposed to the harsh realities of the market which have since been experienced through January and the beginning of February (take Tuesday’s 1.7% plunge as a perfect example, where $26 billion of the market’s value was wiped!) Many perhaps didn’t have the appropriate level of diversification in their portfolio, while others may have bought into companies that were largely overvalued at the time.

One of the best ways for investors to learn is by making mistakes and learning early on how to cope with the market’s downsides and mood swings – not selling out of panic, but learning to hold on for the long-haul and understanding that sharp falls can be normal.

Foolish takeaway

Investors need to ensure their portfolio maintains a strong core, made up of well-established companies (Telstra Corporation Ltd (ASX: TLS) would be a perfect addition at today’s price) while they should also maintain at least some of their wealth in cash (to act as a safeguard against any further losses which may or may not eventuate).

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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