Online Extra: Seven Lessons Investors Should Remember
What we can learn from the bursting of the bubble -- and avoid repeating
"Many investors are now paying the price of believing bubbles never burst," says Eric Bruck, a certified financial planner and principal of Bruck & Caine Advisory in Los Angeles. But investors can learn a lot of lessons from the bull market, he says, which can lead them to making sounder investment decisions in the future. Here are seven of his key lessons:
Lesson 1: Perception = Reality The short term is ruled by perception, while the long term is ruled by economic fundamentals, he says. "The short-term market is like a dysfunctional family, with investors enabling each other to buy and sell daily on rumors and newsbytes, thus self-fulfilling their prophecies."
Lesson 2: The Momentum Bandwagon Momentum investing can be a legitimate strategy, he says, but "not when it becomes more of a mania than a discipline." Investors have confused the luck of riding the tech wave, he says, with the "skill of surfing the tech wave without wiping out."
Lesson 3: Failure to Properly Evaluate Market-Risk Exposure During the bull market, investors forgot that the market exposes them to risk, Bruck says. They looked only at the upside potential, and didn't plan for or figure out how much money they could really tolerate losing.
Lesson 4: Creeping Abandonment of Diversification or Asset Allocation Heady returns lulled investors into abandoning the principles of asset allocation, Bruck says. As tech stocks kept rising, they became more reluctant to keep money in other more stable investments.
Lesson 5: Imprudent Assumption of Margin Debt Investors didn't have enough cash to cover a margin call or enough insurance to deal with personal emergencies, he says.
Lesson 6: No-Sell Strategy Many investors didn't have a strategy, like selling on a 15% drop or selling some of the stock on a 30% gain, he says. If they'd stuck to such a plan, they could have limited their losses and locked in some gains.
Lesson 7: "Frog in the Well" Viewpoint Until recently, most investors have known only a bull market, but this market isn't the market, Bruck says. "Globalization and technology are altering the anatomy of economic cycles. But economic cycles themselves have not been repealed."
