Investors rediscovered the stock market last year, reversing five years of little or no flows into stock funds and enjoying the headiest gains since the Internet bubble. Most experts predict the migration into stocks will continue and stocks will keep rising, though few expect anything close to a repeat of the S&P 500's 2013 total return of 32 percent—one of the best annual gains in history.
The flood into stocks started 12 months ago as income-starved individuals wearied of low bond yields and poured money from savings into dividend-paying blue chips. When interest rates jumped in May and bond prices fell, it triggered a further exodus from bond funds, and many of the proceeds also shifted to stocks.
Nothing stemmed the movement for long—not historical levels of political dysfunction and uncertainty, or the Fed signaling it would wind down a massive bond-buying program. In all, investors poured $437 billion into stock funds, including ETFs, while fleeing fixed income, according to data from fund research firm Lipper. The shift paid off: The average U.S. diversified large-cap stock fund matched the S&P 500 gain, while bond funds, which had performed well in recent years, fell an average 2 percent.
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The move into stocks was broad-based, but it was not indiscriminate. A lingering fear of sudden market downdrafts, such as that in 2008, and of an aging population that cannot count on outlasting another market cycle before retirement, shaped much of the reversal. Simply put, many no longer see stocks for the long run as a viable strategy; they have been searching for more income, but with safety. This approach is driving five investing trends that promise to remain with us through 2014 and longer.