When the stock market is on a roll, is that the best time to invest in stock funds? With so many choices, what are the best stock funds to invest money in for 2014, 2015 and beyond?

Looking back from 2014, the best time to invest money in stock funds was five years ago when the economy and stock prices were in the Infrastructure Investing dumpster. Since then a bull market has rewarded investors with average annual rates of return of 20% and more. The best funds averaged 25% or more per year. At 20% a year your money doubles in less than four years, and at 25% in less than three.

The average investor needs to have money in stocks in order to achieve long term growth. Over the long term they have returned about 10% a year vs. about 6% for bonds and 3% for safe liquid money market investments (often referred to as CASH). It’s not a question of whether or not to invest in equity funds. It’s a matter of how much of your portfolio should be allocated to stock (often called equities).

There’s a lot of difference between the long term average of 10% and the 20% average returns for the past five years. The difference is caused by BEAR (down) markets that occur every few years and can wipe out half or more of the stock market’s value in less than two years, as in late 2007 to early 2009. That’s why 2009 was the best time to invest money in stock funds. Stocks were cheap and average investors were afraid to invest money (more money).

By 2014 the average investor had become more confident and finally started to invest (more money) in stock vs. bond funds. In other words, they were trying to make up for lost time, when stocks were no longer cheap. If another bear market takes hold in 2014 or 2015 not even the best stock funds will be immune to it. The best time to invest money in stock funds is when prices are down and investors are scared… not after five years of 20% average annual returns.

The best equity funds in a bull (up) market tend to be those that invest money in smaller- company growth stocks (small-cap growth stocks) that pay little in the way of dividends. These are the same funds that tend to get clobbered in a bear market. If the market gets ugly in 2014, 2015 and beyond the best stock funds will likely be those that hold high quality, large-company (large-cap) stocks that pay consistent dividends.

As bull markets age they tend to lure investors back into the water. Just when you think it’s safe, it’s time to look back at stock market history. The best time to invest money in stock funds is when stock prices are cheap and fear is the dominate emotion. When investors become complacent after a long uptrend it’s time to lighten up in the market. Your best stock funds in the next downturn: high quality large-cap funds that pay consistent dividends, not growth funds.

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