Every year offers new twists and turns for investors to navigate. And each year provides new lessons that, if properly understood, can help make us better investors in the future. Here are 3 key lessons that I personally learned in 2010, which I think may offer help to other investors as well.
1) Don’t Fight the Fed
The Fed was just not going to let deflation unfold. So they kept the pedal to the metal on quantitative easing. They also coaxed the government into keeping the stimulus flowing, including the latest tax breaks that just passed. This has undeniably helped the economy continue to rebound from the Great Recession. And the stock market came along for the ride. Gladly, most signs point to an improving economy and stock market into 2011.
The cost of these moves is a VERY large debt burden for the US government. Amazingly, world investors are still willing to loan to us the money necessary at extremely low interest rates. One of the challenges for 2011 and beyond is how to keep these creditors satisfied with low rates. We either need to show great economic improvement that leads to a hefty increase in tax revenue for the government and/or austerity measures that don’t cripple the economy. Indeed this is a vital area to watch in 2011.
2) The Bird in the Hand is Better Than Two in the Bush
Double Dippers and other Doomsayers tried their hardest to convince other investors of our coming demise. This was most prevalent in July and August when we took a couple scary turns under Dow 10,000. Gladly, more investors started to realize that the economic turnaround that seemed evident (aka the bird in the hand) was indeed more powerful than the fears of recessions to come (aka two in the bush).
With that stocks rebounded sharply, leading to the best September showing in 70 years. And we have been coasting higher since. Long story short: fear may make for better headlines by the media, yet as investors we need to stay focused on the preponderance of the evidence. And clearly this year the odds were always firmly leaning towards an improving economy and higher equity prices. We need to stay focused on the big picture in the future and not give in to extreme bullish or bearish sentiment.
3) Timing the Market is a Fool’s Errand…And I Am Tired of Playing the Fool
Looking back at my market timing calls this year, I was right about half the time, which is OK. However, I sense that I would have been better just staying the course with a heftier long position.
In particular, I think about the lesson learned from this summer when I got a lot more defensive with my portfolio. I did not do this because I thought the outlook for the economy was diminishing. Rather I did it, unfortunately, because I was afraid that far too many other investors were succumbing to the Double Dip fever noted in point #2 above. So even though I had a good year in 2010, I know that I would have been better off staying closer to 100% invested in stocks in September when we bounced up from Dow 10,000.
I’m not swearing off market timing forever. I just think that I will do a lot less of it going forward. As long as the economic conditions are favorable to stocks, then I will stay heavily long the market as not to miss out on any of the major bull runs that can truly arise at any time.
I look forward to carrying these lessons learned over to 2011 to make it an even more prosperous year. I hope you do the same.
By: Steve Reitmeister