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Sunday, December 20, 2009

Some Good Investing Lessons

From the LA Times

Tom Petruno of the LA Times published a column with his 5 "investment lessons of 2009" They are nothing remarkable, but 3 of them are worth reprinting here. The fact that they need to be pointed out shows how often investors fall into the traps pointed out by researchers in behavioral finance.

But I would make these 2 observations about the ones I reprinted here:

1. Probably the most important role a professional investment advisor can provide is to "save investors from themselves" by preventing them form learning these lessons with their own money. The saving in "tuition" alone is often worth the fee. Although of course the advisor should do more.

2. On the other hand if you have a professional investment advisor and he has not avoided the pitfalls listed you advisor.

From tHe article here are the 3 of the article's 5 investing lessons that will stand the test of time

* Keep the faith in the world's emerging markets. For much of this decade, Americans have been advised to invest overseas because that's where economic growth was likely to be fastest in the long run -- particularly in developing economies such as China, India and Brazil.

The story line still holds up. If anything, it's more appealing now than a year ago. No surprise, then, that many emerging markets, after falling more sharply in 2008 than the U.S. market, also have come back much faster this year.

The average emerging-markets stock mutual fund is up 68% in 2009 after losing 55% last year.

Obviously, emerging markets are more volatile than developed markets, and that isn't going to change soon. But the world is a much different place from even a decade ago. It isn't just that emerging economies are growing faster; they also have accumulated vast wealth that gives them economic critical mass.

We are the debtor now; they are the creditors. Why would you not want a long-term stake in the creditors?

* You can still trust basic portfolio diversification. In other words, making sure your portfolio has a broad mix of investments remains the best strategy for achieving growth without undue risk to your nest egg.

In the fall of 2008 nearly every type of asset was collapsing, largely because hedge funds and other big investors had to sell whatever they could to raise cash as credit dried up and lenders called in loans....

Simply put, broad-based diversification raises the likelihood that you'll always have some assets doing well, at least partly offsetting those that aren't. And if some chunk of your portfolio is holding up in tough times, you will be less inclined to sell your losers at the wrong point -- i.e., at or near the bottom.

Diversification is such a simple concept, and so easy to accomplish. It's amazing to me how many investors think there must be some trick to it.....

* Don't invest solely by looking in the rearview mirror. After a year like 2008, it may be hard to take your mind off how much you've lost. That's understandable, but it also can obscure the opportunities in front of you.

Classic rearview-mirror investing leads to buying what has recently performed best. That's the opposite of what people know they should do, which is to buy low.

I think the greater problem now with the rearview mirror is that many people can't stop thinking about how much they're down. Stop counting your losses, and focus more on what your portfolio needs to meet your long-term goals. You'll feel better.

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