Where should you invest in 2014?

New Year's resolutions are typically abandoned very quickly, with promises to sort out finances or start contributing to a pension quickly re-prioritised due to January's higher than normal credit card bills. Investors who did follow through in January 2013, though, will have been celebrating over Christmas, as the equity markets delivered some spectacular returns.

The Japanese market led the way - up 51% from the start of the year to 1 December - followed by the US market, which was up more than 26%, buoyed by their central bank doing everything it could to assist the US economy. Europe and the UK were also positive in what was a great year for almost all markets, with the notable exception of those known as the Bric countries (Brazil, Russia, India and China), which disappointed.

If you weren't lucky enough to benefit from 2013's rising markets, the temptation might be to convince yourself you've missed the boat – but the reality is over the long term the best place to generate positive returns is the equity market, and most people simply don't take enough risk with their investments when they're young enough to benefit from time and compound interest.

The other significant benefit to stepping on to the investment ladder is the forthcoming flat-rate state pension, which makes all investment worth it. Previously, some savers would have been just as well off if they hadn't saved, due to means-testing. However, the move to a flat-rate pension means that all your savings should count towards a better financial future.

Brighter prospects

Although the prospects for equity markets in 2014 are uncertain, you do have central banks on both sides of the pond determined to lower unemployment and support growth – a good start.

You also have the possibility of a recovery in developing countries that have underperformed this year, albeit after some very good returns in previous years. On the down side, the gradual withdrawal of quantitative easing and the possibility of rising interest rates will mean certain sectors, including financial stocks, come under increasing pressure. But whether you're topping up existing investments or starting out, there are a few golden rules to bear in mind and these include: invest regularly; diversify; be tax-efficient; and take a long-term view.

Rather than investing a lump sum, it often makes sense to smoothe the peaks and troughs of investing by drip-feeding money into the markets. Known as pound-cost averaging, regular investing reduces risk overall. Most brokers offer a regular investment service, often for considerably less than the cost of normal trading, as they aggregate all the deals together. Removing some of the volatility and risk and buying more units when share prices are lower is an attractive option.

Even when markets are increasing globally, the different level of return achieved from different geographic areas can be vast. Choosing to invest in a geographically diverse fund or, even better, a mix of different UK and global funds, gives you a better chance and also reduces some of the specific geographic risks involved. With thousands of funds to choose from, it can be difficult to know where to start - but Moneywise certainly helps.

Isas and pensions

Using an Isa or pension is a must. The range of investment options and the ability to invest regularly are both available with tax-efficient accounts and in many cases there is no additional cost to investing in an Isa. The long-term benefits of an Isa can't be overstated, so make this an essential part of your overall strategy.

Taking a long-term view may appear simple but it does come with conditions. The first is you don't make your investment decisions by watching the 10 o'clock news and deciding to withdraw your money if the market becomes more volatile. The second is you don't take the opposite approach and simply ignore your investments altogether. Whatever your level of interest in the market, you need to dedicate some time to reviewing your investments at least on a semi-regular basis. You might find you actually enjoy it.

If you're wavering on whether to start investing or not, hopefully you'll realise it definitely does pay to invest and you'll be the one celebrating next Christmas.

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Your Comments

Great article. Is there an article with advice on what risk to take when you're young enough to benefit from time and compound interest? 
I have a UK equity ISA that I've had for 4 years and I make regular monthly payments. I'm 28 years old and aim to keep it for many years. What sort of risk do you mean in your article? 
Thank you.