Three New Year's investing resolutions

By Walter Updegrave, senior editor

(Money Magazine) -- Question: I missed the boat on the market rally that started in September because I thought stocks weren't ready to move due to the weak economy and high unemployment.

Frankly, I don't understand what investors see in this market and I'm confused about why it's going up. Do you think a correction is coming and, if so, when? I'd like to get back in the market and make some money. -- Mark, College Point, N.Y.


Answer: Your experience just confirms the futility of trying to guess the best time to move in and out of the market.

Whether you're going by your gut or using any of the valuation gauges, technical indicators or proprietary market-timing systems floating around, the result is much the same: Your chances of consistently predicting market movements range from slim to zero.

But you can find an even better illustration of investors' inability to predict the market's ups and downs by looking at what happened -- or, more accurately, what didn't happen -- during the market's big rise last year.

In 2009, the Standard & Poor's 500 climbed more than 60% from its low in early March to the end of December, en route to a healthy total return of 26.5% for the full year. Given those impressive gains, you'd figure that investors would have been falling all over themselves to get a piece of the action, right? Wrong.

As Morningstar's fund flow figures show, investors withdrew nearly $69 billion from U.S. stocks during the year. Instead, they piled into bonds to the tune of $404 billion.

The return on the broad bond market in 2009: 6%. Maybe doubts about the weak economy and high unemployment also kept them out of the stock market.

So rather than do you a disservice by trying to predict when the next correction will arrive -- truth is, I haven't the foggiest idea -- I'm going to recommend that you abandon this quixotic notion of calling market turns and focus on the following three suggestions instead.

Since we're so close to the end of the year, you can think of them as Three New Year's Investing Resolutions.

Resolution #1: Set an actual investment strategy. By strategy, I don't mean something like, "If the Dow's 50-day moving average drops below its 200-day moving average in a dreaded "death cross," short the stock market for all you're worth."

I'm talking about sitting down and going over your investment goals, how long it will be until you need to tap your investments, thinking about how much risk you're really willing to take and then creating a diversified mix of stock and bond funds that's appropriate for your situation.

If you need to familiarize yourself with fundamental concepts like asset allocation before you do this, fine.

You can check out our MONEY 101 section before going to our Fix Your Mix tool for tips on how to spread your money among stock and bond funds. And if you want to exercise even more due diligence, you can test how different stock-bond mixes might perform over various periods of time by going to the Morningstar's Asset Allocator tool.

That point is, though, that you want to have a plan. Otherwise, you'll be like someone setting out in a car with no real destination in mind and no map. There's no telling where you'll end up.

Resolution #2: Stifle it! Fans of the 1970s All in the Family sitcom will remember that "Stifle it!" or "Stifle Yourself!" was what Archie Bunker would say to his longwinded wife Edith.

But I'm suggesting you apply this phrase to investing in a different way -- namely, that you stifle the impulse to make changes to your portfolio every time you read a story about how to capitalize on rising gold prices, the Fed's quantitative easing program or whatever the investment theme du jour happens to be.

As counterintuitive as it may seem, the more investing moves you make, the more mistakes you're likely to make, the more extra costs you'll probably incur and the lower your returns are likely to be.

If you want to see how rapid-fire stock traders fare vs. investors who aren't as eager to pull the trigger, I suggest you check out the work of University of California finance professor Terrance Odean.

Resolution #3: Stick to resolutions #1 and #2. I'm not trying to be cute here. I'm serious.

The fact is that setting a strategy and then standing pat (aside from periodic rebalancing) is hard, especially when every investing pro is telling you that the New Normal requires a new investing strategy or when every fiber of your being is screaming you'll be left behind if you don't move a big chunk of your portfolio into emerging markets funds.

Indeed, it's when something big is afoot -- the market's falling apart or in the midst of a huge surge -- that the temptation to make some move, any move, is greatest.

Of course, those are also the times when it's most crucial that you don't give in to the urge to abandon your strategy, since that's when you're most in danger of selling out at a bottom or buying in as the sizzle is about to fizzle.

So find some way to squelch the all-too-natural impulse to jettison your strategy just when you need it most. If you know that watching TV finance and investing shows leaves you itching to tinker with your portfolio, then don't watch them. (Back in Catholic grade school in the late 50s and early 60s, we called this "avoiding the near occasion of sin.")

Or maybe some other technique will work, like promising yourself you'll always wait at least a week before making a change in your portfolio. Or vowing that before you add or jettison a holding, you'll find five reasons why this move might not work out.

But come up with some speed bump that will slow you down, so you're less likely to make a rash decision you may later regret. Can I promise that making and sticking to these three resolutions will prevent you from incurring losses or generate the highest possible returns? Of course not.

But I can tell you that by adopting this approach you will at least have a reasonable and rational plan for investing in the face of market uncertainty. And that beats guesswork any time. To top of page

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