What a difference a year makes. If 2008 was about what went wrong on Wall Street, 2009 was defined mainly by what went right, at least for the financial markets.
Stocks in India sure did not start 2009 on the right foot. They tumbled right until early March amid the fallout from the September 2008 Lehman Brothers bankruptcy. But from the depths of the March lows, and 197 trading sessions later, the markets are almost at their annual high! The <>Sensex has surged nearly 120% since then. That is not all! Stocks across the board - even some blue chips that are considered to be slow movers - have risen by anywhere between 3 times and 5 times.
As we move into 2010, caution (though with a tinge of hope) is the buzzword for everyone - traders, speculators, and investors. Well, the first two categories - traders and speculators- are outside the purview of this discussion. We will focus on the biggest lessons that investors must have learnt from 2009.
The first lesson has been to stay away from experts who change their market forecasts with their changing moods. We saw several such examples in 2009. As the year began, 'strategists' and 'experts' filled business channels trying to outdo each other in spreading fear.
One foreign investment bank in fact went to an extent of predicting an odd number for the Sensex by December 2009! Its report stated - "Our probability weighted Sensex outcome for December 2009 is 8,559." A few others were a bit more optimistic. They set the year-end Sensex target at 10,000-12,000.
Seeing by where the index stands today, we do not feel the need to elaborate on these short-term predictions! But you need to understand that such words act as just fillers for business channels and do not have any of your interests in mind.
So, as you listen to the experts on their 2010 view, you know what to do! Stay clear of the noise and constant chatter. Better keep the business channels off till the middle of January. The 2010 predictions will be off-air by then, we hope. And this might also help you clear your mind.
Another important lesson that 2009 taught was the importance of asset allocation. A 100% allocation to equities might have given you very good returns during the year. But note that this is not the right way to go about it. Investors having 100% in equities in 2008 will vouch for that.
A proper allocation to key assets like equities, gold, bonds, real estate, and cash (for emergency needs) is what can help you earn safe and sustainable returns over the long run.
While a single allocation does not work well for all kinds of investors, those with a 10-year horizon can have around 40-50% allocation to stocks. Another 5-10% can be put into gold, 5-10% in cash/liquid funds (for emergency needs), and 30-40% into property.
But always remember, periodically rebalance such an allocation. For instance, if your 40-50% stock allocation rises to 60-70% (possibly as the markets rise), then sell some stocks and add to other asset classes. This will help you bring your portfolio in line with your original allocation.
A third key lesson from 2009 was the failure of big economic forecasts. We have always talked about the irrelevance of working hard on predicting where the economy is heading. Or for that matter where inflation, interest rates, or currency rates are heading in the short run. And if you did just that during 2009 before making your investment decisions, you must have know the irrelevance yourself.
The legendary investor Peter Lynch once said - "If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes." So the next time you find yourself spending more than 3 minutes in a year worrying about economy's performance over the next year, you know you might be missing out on the time that you can instead use to identify new quality stocks.
In conclusion, 2009, like all other years has many lessons for you, the investor. The big idea is to use these lessons to become a better investor in the future. And when we say 'future', it doesn't just mean 2010 but the next 5 to 10 years.
Now as you assess some more lessons that the past 197 trading sessions have taught you, we hope the next 251 (of 2010) bring you a lot of good times to buy quality stocks to help build the portfolio of a lifetime.
Here's a toast to your long-term health and financial well-being!