Investing: Cleaning up after the crackup
Learning from “the Year from Hell” and understanding the new rules for investing
It’s been one year since the financial crisis rocked the globe, and many people are eager to put it behind them, said Lauren Young in BusinessWeek. Yet there are important lessons to be learned from what one former Lehman Brothers employee aptly calls “the Year from Hell.” For example, in hindsight, that employee shouldn’t have loaded up on Lehman stock and options; there’s a good reason financial advisors recommend putting no more than 10 percent of your portfolio in employer stock. An emergency savings fund would have also made the year less painful. The lesson there? “Liquidity, liquidity, liquidity.”
Post-crash, “that which didn’t kill your nest egg can make you smarter about your investments,” said Penelope Wang in Money. Last year, a diversified asset allocation would have left your portfolio down overall. But a well-adjusted portfolio held up better than one stuffed with stocks. If you held a mix of U.S. stocks, foreign stocks, cash, and bonds, you would have lost 28 percent between Sept. 1, 2008 and March 9, 2009, the market bottom. Had you invested solely in the Standard & Poor’s 500, you would have lost 50 percent. If you invest in funds, the only way to be truly diversified is to “drill down in your portfolio to see what you actually own.” Use Morningstar.com’s “X-ray” tool to see whether your portfolio is top-heavy with one industry or investing style.
While the stock market right now seems healthier, investment pros agree that the rules for investing have changed, said Reshma Kapadia in SmartMoney. “One of the biggest legacies of the credit crisis is that credit will be much harder to come by, for companies and individuals.” When picking stocks, look for firms with lots of cash, little debt, and substantial market share. “Fund managers say many of these high-quality firms—the likes of Coca-Cola (KO1) and Microsoft (MSFT2)—are still relatively cheap.” Bonds, meanwhile, are a whole new ballgame. “The differences among Treasury, municipal, corporate, and high-yield bonds have rarely been as stark.” Corporate bonds are producing “stock-like returns with less risk,” while Treasurys have been bid up so much that they may actually be risky.