Last year's
financial crisisreminded investors just how risky stock
investing can be. Yet while the crisis gave many investors a
strong education in how the financial markets work in times
of panic, you need to be careful not to take the wrong
lessons from your experiences during the bear market.
The first real bear
This bear market marks the first time that many
investors have ever seen a truly broad-based bear market in
stocks. Consider some previous experiences you've had with
down markets:
SYSCO (NYSE: SYY) and
Berkshire Hathaway (NYSE: BRK-A), actually
posted substantial gains during that bear market.
Before 2000, bad markets were short and sweet, with
violent downward swings that quickly reversed themselves.
These mini-crises gave the impression that all you had to
do to beat down markets was to wait a short time to get all
your money back.
Even after the
1987 stock market crash, it only took a couple of years
for stocks to recover everything they'd lost. You have to
go back to the 1970s to see stocks behave as badly as they
have recently.
By comparison, this bear market has taken no prisoners.
Few stocks bucked the trend, as nearly every sector
eventually succumbed to losses. And even after a six-month
rally amid
signs of economic recovery, stocks are still off nearly
30% over the past two years. It seems unlikely they'll be
returning to their 2007 highs anytime soon.
The wrong lessons
After suffering for such a long time, you've probably
been tempted to do whatever it takes to keep anything like
this from hurting your finances again. But many of those
things would be exactly the
wrongthing to do right now. Here are just a few:
1. Giving up on diversification.
Because the bear market punished stocks of all kinds,
large and small, foreign and domestic, you might think that a
diversified portfoliois overrated. But even though most
markets suffered negative returns this time around, that's
not always going to be the case. More often, various types of
assets cycle in and out of favor. During 2000 and 2001,
small-cap value stocks like
Humana (NYSE: HUM) and
Toll Brothers (NYSE: TOL) put in big positive
performances. In the bull market that followed, many
international stocks outperformed U.S. stocks, with some
now-popular stocks putting in stellar performance.
Stock
Total Return, 1/1/2003 to 12/31/2007
Petroleo Brasileiro (NYSE: PBR)
1,770%
Vale (NYSE: VALE)
1,463%
Baidu (Nasdaq: BIDU)
491%*
Source: Yahoo! Finance.
* Return from opening price on Aug. 5, 2005, when
Baidu had its IPO.
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