New Year's Investing Resolutions for 2011
Good Planning and Patience Are Prudential
After having witnessed its bottom fallen out in 2007, the stock market came roaring back in 2009 impressively, with the S&P 500 Index recovering half of the lost ground. While 2010 continued to be a healthy year for investors, anemic economical recovery, sky-high unemployment rate and dramatic power shifts in the political theater are keeping people jittery about their investment future. As a result, investors withdrew nearly $69 billion from U.S. stocks during the year, and piled into bonds to the tune of $404 billion, according to Morningstar's fund flow figures.
The arrival of the year 2011 does not promise any more stability or clarity at the investment front. And under the circumstance investors are getting even more anxious. But time and time again it had been proven that whether you're going by your gut or using any of the valuation gauges, technical indicators or proprietary market-timing systems floating around, the result is much the same: Your chances of consistently predicting market movements range from slim to zero. Therefore, rather than cracking open a fortune cookie to see where is going to snow next second, or when the next market correction will sneak up on us, it’s better to have certain resolutions in place to help quell the impulse of the itchy fingers:
Resolution #1: Stay invested in equities.
It’s understandable and predictable that people flock to stable sources of income during uncertain times. The price of gold has tripled over the past five years, surpassing $1,400 per ounce in 2010. The buying frenzy doesn’t seem to be stopping anytime soon with the urging of certain celebrity experts on CNBC. Meanwhile the safe haven statue that bonds are perceived to offer has lured a total of $937 billion into bond funds since the depth of the financial crisis in September of 2008, dwarfing the $195 billion that flowed into stock funds over the same period, according to Fortune magazine.
But if history is any lesson, it teaches us that the recent gold rush and bonds crave have “bubble” written all over them. Even Pimco’s Bill Gross, the legendary bond king, in November 2010 called an end to the 30-year golden age that brought bond investors near double digit annual returns.
The current political and economical uncertainty, plus the volatile nature of the stock market make many investors shy away from equities. On the other hand the recent resurgence of the stock market, which saw the S&P 500 nearly doubled since its bottom in March 2009, leads some others believe that they have missed the boat.
But the truth of matter is, the equity investors’ misfortune in the last couple of years has created a tremendous opportunity. Despite the recent run-up, many of the quality stocks are still under valued. And the continuing recovery of the economies in the U.S. and the rest of the world, which appear to be gaining steam, will mean good news to those who get in early and with patience. Still don’t want to miss the steady income? There are plenty of high quality stocks that provide comparable or better dividend yields than bonds, with great potential of growth.
Resolution #2: Plan a real investment strategy.
Different people, and people in different stages of life have different needs, wants and risk tolerance. A newly minted college grad may think he is care-free for a while; a young couple would imagine saving up enough money for the down payment for their first home; parents who have children in high school should consider how they can help their kids through college; and folks nearing retirement must worry whether their nest eggs will last…
So sit down and go over your financial state and investment goals to see how long it will be until you need to tap your investments, think about how much risk you are really willing to take and then creating a diversified mix of stocks, bonds and other instruments that is appropriate for your own situation.
Of course you need to familiarize yourself with fundamental concepts like asset evaluation and allocation before you do this. You may also want to test out a variety of investment mixes to find out what suites you the best. Fortunately there are chock full of resources on the Web that can provide useful tools. Money and Morningstar are two that you can start with.
You just need to have a plan. Otherwise, in these uncertain times you will be like flying in the fog at night with no instruments installed on the plane. Try to figure out where you are going.
Resolution #3: Stay the course.
Every day a lot of things is happening; and every minute a lot of people is telling you a lot of things is happening. And in this world over-crowded with electronics, Internet and 4G, the noises are magnified a millions times. This makes setting a strategy and then sticking to it very difficult, especially when virtually every investing pro seems to be telling you that the “new normal” calls for a new investing strategy or when every cell in your brain is screaming the train is leaving the station without you if you don't move a big chunk of your dough into emerging markets funds.
However it’s no longer a secret that no one can ever predict the market successfully all the time. Those “actively managed” mutual funds are more likely end up in the bottom half of performance scale. As for individual investors, the more investing moves you make, the more mistakes you are likely to make, the more extra expenses you'll probably incur and therefore the lower your returns are likely to be.
It’s human nature: when something major arises - the market's falling apart or in the midst of a huge surge - that the temptation to make some move, any move, is the greatest. But this is also the time when it's most crucial that you don't give in to the urge to abandon your strategy, since that's when you're most in danger of selling out at a bottom or buying in as the sizzle is about to fizzle.
So find some way to squelch the all-too-natural impulse to jettison your strategy just when you need it most. If you know that watching CNBC leaves you itching to tinker with your portfolio, then switch channel. Or maybe some other technique will work, like the one you use when you wait a month before buying that 60-inch LED TV. Or vowing that before you add or cut a holding, you'll find five reasons why this move might not be a good idea. Just come up with some speed bump that will slow you down, so you're less likely to make a rash decision you may later regret.
There is no guarantee that making and sticking to these three resolutions in the new year will help you get your dream house or stash enough for your daughter’s law school, or even simply prevent you from suffering some losses. But by implementing them you will at least have something reasonable and rational to follow and rely on for investing in this unpredictable climate. And that beats a crystal ball any time.
- Morningstar Stock, Mutual Fund, Hedge Fund, ETF Investment Research
- Fortune 500 Daily & Breaking Business News - FORTUNE on CNNMoney.com
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