The 5 Worst Investments of 2014

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For more than five years now, the bull market in stocks has sent the Dow Jones Industrials (^DJI) and other major market benchmarks soaring. Even though 2014 has failed to match the strength of 2013, the Dow has still posted an impressive gain of nearly 7 percent, not including the dividends that its components have paid along the way.

But just because stocks have kept to their winning ways in 2014 doesn't mean that every investor was so fortunate. In fact, some types of investments have performed abominably this year, costing investors huge losses. Let's take a look at five of the worst investments of 2014 to see if you can draw some conclusions to help guide better investing decisions in 2015 and beyond.

5. Foreign Currency Investments

The strength of the U.S. dollar was one of the highlights of 2014, as sluggish economies in Japan and Europe combined with slowing growth in China and other emerging markets stood in stark contrast to the health of the U.S. economy. As a result, foreign investors flooded into dollar-denominated U.S. investments, and that hurt the value of the foreign currencies that they sold in order to make purchases in U.S. dollars. The CurrencyShares Japanese Yen (FXY) lost another 10 percent in 2014 after an 18 percent drop in 2013, and the CurrencyShares Euro (FXE) came close to matching the yen's poor performance with an almost 10-percent decline this year. Typically, currency moves run in cycles, and any recovery in the global economy could reverse the dollar's recent strength. Still, there's no guarantee that the trend this year won't continue well into 2015.

4. Crude Oil

Anyone who's been to a gas station recently has seen the precipitous drop in gasoline prices over the past several months. But what's good news for consumers is bad news for the companies that rely on sales of crude oil and other energy products to generate profits. Over 2014, world oil prices have fallen from above $110 per barrel to below $80, leaving the global oil community in disarray and many countries struggling to figure out how to stem an even more precipitous future decline. Energy stocks have fallen recently by dramatic amounts, but the real losers have been commodity-tracking vehicles like United States Oil (USO), which is down more than 20 percent for the year.

3. Russian Stocks

The Russian stock market fell prey to severe downward pressure in 2014, as the emerging-market country introduced geopolitical risk into the financial markets. After the annexation of Crimea and heightened tensions in Ukraine, the threat of sanctions from Western allies led to widespread fears about the sustainability of Russia's economy. Moreover, weakness in commodities like crude oil and precious metals contributed to sending the value of the Russian ruble downward, further exacerbating the losses for U.S. investors. Even with the Market Vectors Russia ETF (RSX) having fallen 28 percent so far in 2014, the prospects for Russian stocks remain highly uncertain as the energy markets face further weakness.

2. Bets on Higher Interest Rates

In the middle of 2013, interest rates skyrocketed in short order when the Federal Reserve announced that it would steadily bring its quantitative easing program to an end. Investors feared that the end of government bond purchases would force long-term rates higher, and many bearish investors looked at leveraged investments like the ProShares UltraShort 20+ Year Treasury ETF (TBT) as a potential source of profits. Yet Treasury rates have remained low and have even declined in recent months, and that has sent the ProShares ETF down by more than 30 percent so far this year. Even though the leverage didn't help investors in this ETF, those who bought Treasuries fared far better than those who bet against them in 2014. Many believe rates will finally start to climb in 2015, but the potential for another mistake remains high given all the uncertainty in the bond market.

1. Volatility-Based Investments

For years, investors have expected that the long upward trajectory for stocks would come to an end, and certain specialized volatility-tracking investments are designed to produce huge profits in the event of a big decline for stocks. Yet once again in 2014, the stock market has proven incredibly resilient, and that has sent these volatility-trackers to fresh and substantial losses for another year. The iPath S&P 500 VIX ST Futures ETN (VXX) has lost about a third of its value so far in 2014, but the real victims have been similar instruments that used leverage to magnify their returns. The VelocityShares Daily 2x VIX ST ETN (TVIX) is down more than two-thirds this year, and more alarmingly, it suffered declines of more than 90 percent in both 2012 and 2013, reducing its split-adjusted share price from over $11,000 in late 2010 to less than $3 currently. These volatility-linked investments have performed well in the brief periods when stocks fell, but over the long run, the bull market has crushed them.

No one likes to choose losing investments, but sometimes, certain types of investments face challenges that prove almost impossible to overcome. Just because these investments didn't perform well in 2014 doesn't mean they'll automatically fail in 2015 as well, but you should at least learn some of the traits that contributed to their poor performance and keep a close eye on them to see whether they can recover.

Motley Fool contributor Dan Caplinger tries to learn from his mistakes and turn them into future winners. He doesn't own shares of any of the ETFs mentioned in this article. You can follow him on Twitter @DanCaplinger or on Google+. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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