Top five investing lessons of 2009

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Typically at year’s end, when investors assess their portfolio winners and losers, they can look back and identify the smart decisions they made during the last 12 months -- and the moves they’d love to rescind.

This year, many people may figure that the only thing they learned about investing was the value of inertia: just doing nothing and hoping for the best.

It’s true that the only way you could have screwed up monumentally in 2009 was by bailing out of stock and bond markets and staying out.


Barring some unforeseen calamity between now and Dec. 31, the vast majority of stock mutual funds, and many bond funds, will record hefty double-digit returns for the year. The average domestic stock fund was up 27.8% from Jan. 1 through Friday, according to Morningstar Inc.

Of course, that gain is bittersweet, at best, because it’s a rebound from the devastating declines of 2008. And most people’s portfolios still are a long way from recouping all of what they’ve lost.

Inertia -- aka buy and hold -- may well have saved a lot of people from the basic instinct to flee the markets in the first two months of this year, when stock prices were spiraling down the drain.

I’m sure that the apparent wisdom of sitting tight is the lesson the mutual fund industry, for one, would like investors to take away from 2009.

But I’d like to suggest that we all learned a lot more than that this year about markets and about investing in general.

Here are my five top lessons of 2009:

* When facing economic collapse, don’t underestimate central banks’ power to forestall Armageddon. Or, as the time-honored Wall Street line goes, “Don’t fight the Fed.”

Amid the credit-market meltdown of late 2008, the Federal Reserve under Chairman Ben S. Bernanke committed all of its resources to saving the banking system and keeping recession from becoming depression.


As we’ve seen, the Fed’s bag of tricks is nearly bottomless: short-term interest rates at zero, an alphabet soup of lending programs, more than $1.7 trillion of purchases of mortgage and Treasury bonds, etc.

The Fed’s intervention was all the more powerful because it was coordinated with every other major central bank on Earth. And unlike the Bank of Japan when that country’s economic slide accelerated in the 1990s, the Fed opted against timidity.

Mission accomplished? We know we avoided a new depression in 2009. We don’t know if the fix is permanent -- or whether the cost will be severe inflation down the road.

What should be clear from markets’ reactions this year, though, is that you’re still facing lousy odds if you bet against central banks that are in full-on rescue mode.

* Keep the faith in the world’s emerging markets. For much of this decade, Americans have been advised to invest overseas because that’s where economic growth was likely to be fastest in the long run -- particularly in developing economies such as China, India and Brazil.

The story line still holds up. If anything, it’s more appealing now than a year ago. No surprise, then, that many emerging markets, after falling more sharply in 2008 than the U.S. market, also have come back much faster this year.


The average emerging-markets stock mutual fund is up 68% in 2009 after losing 55% last year.

Obviously, emerging markets are more volatile than developed markets, and that isn’t going to change soon. But the world is a much different place from even a decade ago. It isn’t just that emerging economies are growing faster; they also have accumulated vast wealth that gives them economic critical mass.

We are the debtor now; they are the creditors. Why would you not want a long-term stake in the creditors?

* You can still trust basic portfolio diversification. In other words, making sure your portfolio has a broad mix of investments remains the best strategy for achieving growth without undue risk to your nest egg.

In the fall of 2008 nearly every type of asset was collapsing, largely because hedge funds and other big investors had to sell whatever they could to raise cash as credit dried up and lenders called in loans.

But that was an extraordinary anomaly. And even then, bonds, for example, generally lost a lot less than stocks, which is how markets are supposed to work.


By early this year the lock-step movement of assets was over. Many emerging stock markets, for example, were holding up even as U.S. shares continued to plummet in January and February. The price of gold rose nearly 7% in those two months. Municipal bonds also were rallying.

Simply put, broad-based diversification raises the likelihood that you’ll always have some assets doing well, at least partly offsetting those that aren’t. And if some chunk of your portfolio is holding up in tough times, you will be less inclined to sell your losers at the wrong point -- i.e., at or near the bottom.

Diversification is such a simple concept, and so easy to accomplish. It’s amazing to me how many investors think there must be some trick to it.

* When the facts change, be prepared to change your mind. That’s paraphrasing John Maynard Keynes’ famous quote. I’m applying it here to the economy.

Last spring, U.S. economic data began to suggest that the recession was bottoming. Remember Bernanke’s reference to “green shoots”?

Many stock market bears didn’t believe that things could get better any time soon, and wanted more proof of an economic turnaround. But global markets didn’t wait for confirmation. They usually don’t. Stocks began to rebound in March and kept going in April and May. As we now know, the economy began to grow again in the third quarter.


I’m not suggesting that markets are always prescient. Nor am I trying to minimize the horrid state of the labor market even in the face of the economy’s return to growth.

But hard-core bears in spring and summer refused to accept that plenty of economic indicators were turning for the better. And in a world awash in cheap money from central banks, all it took to entice many investors back to severely depressed markets was the belief that things had stopped getting worse.

Human nature doesn’t change: Investing is forever a battle between greed and fear. This year, greed regained the upper hand.

* Don’t invest solely by looking in the rearview mirror. After a year like 2008, it may be hard to take your mind off how much you’ve lost. That’s understandable, but it also can obscure the opportunities in front of you.

Classic rearview-mirror investing leads to buying what has recently performed best. That’s the opposite of what people know they should do, which is to buy low.

I think the greater problem now with the rearview mirror is that many people can’t stop thinking about how much they’re down. Stop counting your losses, and focus more on what your portfolio needs to meet your long-term goals. You’ll feel better.