Investing: New rules for charting a profitable course

The recent market crash proved that many old rules of investing were tragically wrong, said Mark Jewell in the Associated Press. Generations of investors were taught that stocks rise over the long term. Yet over the past decade, stocks averaged an annual loss of 0.5 percent, while bonds gained an average of 6.2 percent. “You have to measure back 20 years to find a long-term edge for stocks, and even then it’s small.” Now many investors are shifting a bigger share of their portfolios to bonds and alternative assets, such as gold and real estate. Investors used to chase annual returns of 5 percent to 7 percent. Now they simply hope to stay at par. Forget about finding security in historically “safe” investments. Now “nothing, including the humdrum money-market fund, is risk-free.”

Let’s not get carried away, though, said Dean Foust in BusinessWeek. “Every decade or so, investors are told to heed a new megatrend whose chief appeal is, well, its newness.” The latest paradigm shift, “championed” by Pimco’s Bill Gross, says you need to get used to a “new normal,” and should hold as little as 30 percent of your portfolio in stocks. But such an extreme shift could itself prove unwise, if all this emphasis on the new normal turns out to be to be “merely the latest investment fad.” Instead, consider a “new balance.” Keep enough in stocks to benefit from a sustained rally. But “beef up” your exposure to fixed-income and alternative assets to survive what could be a “few years of treading water.”

Investors are often too quick to rewrite the rules during times of panic or euphoria, said Nate Hardcastle in MoneyWatch.com. Take heed of what investing legend Sir John Templeton once said: “The four most dangerous words on Wall Street are, ‘This time it’s different.’” In fact, the stock market has “behaved pretty much as it usually does in recessions,” and the rebound is following a familiar script as well. So “long-term investors shouldn’t throw the old wisdom out the window.” If anything, this “once-in-a-generation” bear market should reinforce tried-and-true advice: If you can’t afford to lose money in the next 10 years, keep it in cash and bonds. If time is on your side, invest in stocks.

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