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12 Lessons for Investors From a Terrible 2008

(source: wsj)

It's been a terrible year, but those who learn some valuable lessons won't walk away empty handed. What lessons have you learned, or had reinforced? I'd love to hear. Here are 12 that struck me.

  • 1. You have to take charge of your own finances. And that means understanding where your money is invested and why. There's only so far you can rely on advisers, portfolio managers and company plans. After all, you will own the results, not them.
  • 2. Never put all your trust in one financial whiz, no matter how highly recommended. Few turn out to be Bernie Madoffs, thank heavens. But most of Wall Street's best and brightest still lost 40% or more this year.
  • 3. Never invest in something you don't understand. For years, I refused to recommend Fannie Mae and Freddie Mac stock for this reason, despite the urgings of various market sources. Imagine my relief when it emerged that nobody else really understood them either — including their own CEOs. Simple stocks, like Amazon, or Anheuser-Busch, rarely embarrass you in this way.
  • 4. Invest more, not less. Is that a guffaw from the peanut gallery? I don't blame you. Your savings just fell 40% or more. But higher risk and lower returns means you need to invest more to reach your goals.
  • 5. Never assume there is investment safety in numbers. The most "popular" investments often turn out worst — from technology stocks (1999) to real estate (2004) to emerging markets (2006-7).
  • 6. Your grandma was right after all. A penny saved really is a penny earned. Debt really is dangerous. And an economy where it's easier to borrow $10,000 on a credit card than find a working electrician is heading for trouble.
  • 7. Psmith was right, too. Who? This fictional character, created by the great English comic novelist P.G. Wodehouse, frequently warned against the perils of confusing "the unusual with the impossible." Certainly the events of the last year were unusual. Alas, too many thought they were impossible.
  • 8. Own plenty of bonds. Yes, they're less exciting than stocks. Turns out, that's the point. There's little use keeping everything in stocks "for the long run" if they kill before you get there.
  • 9. When someone offers you obviously good value — like inflation-protected Treasurys with a 4% real yield — take it. When they offer you bad value — like those same bonds with a real yield of 0%, as they had last winter — don't.
  • 10. Avoid needless risks. Those who speculated on Citigroup or WaMu or General Motors stocks suffered more than most this year. The biggest investment mistakes will generally be those you bought, not ones you missed.
  • 11. Take all expert predictions with a pinch of salt. That goes double when the experts all agree. Remember, most economists successfully predicted 12 of the last four recessions, but somehow missed this one. After long experience, when I read a headline like "Pound Poised to Gain in 2009 as Top Strategists See Slower Cuts in Rates" (Bloomberg, Dec. 30) it makes me fear for the poor old pound sterling.
  • 12. Still trying to predict the next short-term move, or call the market bottom? Sure, maybe November (Dow 7550) will turn out to be the market low. But that's what some people said in January (Dow 11971), March (11740), July (10963), September (10365), and October (8176). One day, doubtless, they will be right.

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