There is almost no limit to the ability of investors to ignore the lessons of the past. This cost them dearly last year. Here are six of the most important of these lessons:
1) Beware of market forecasts, even by experts. As 2008 began, strategists from Wall Street’s 12 major firms forecast the end-of-the-year closing level and earnings of the Standard and Poor’s 500 Stock Index. On average, the forecast was for a year-end price of 1,640 and earnings of $97. There was remarkably little disparity of opinion among these sages.
Reality: the S&P closed the year at 903, with reported earnings estimated at $50.
Strategists aren’t always wrong. But they have been consistent, betting year after year that the market will rise, usually by about 10%. Thus, they got it about right in 2004, 2006 and 2007, but also totally missed the market declines in 2000, 2001 and 2002, and vastly underestimated the resurgence in 2003.
Ignore the forecasts of inevitably bullish strategists. Bearish strategists on Wall Street’s payroll don’t survive for long.
2) Never underrate the importance of asset allocation. Investing is not about owning only common stocks. Nor are historical stock returns a sound guide to future returns. Virtually all investors should keep some “dry powder” in their portfolios in the form of high-grade short- and intermediate-term bonds. Investors who failed to learn that lesson fell on especially hard times in 2008.
The full article with all six lessons.
