> The future of investment returns are usually brightest when current economic conditions

           seem the darkest.        

 

        > Great deals abound in the investment markets as people are forced to cash in their

           investments at lower prices our of fear or necessity.

 

 

A disciplined strategy is the key to achieving investment success over the long haul.  Without a strategy, investors could be tempted to abandon ship during difficult economic times.  Shying away from investment markets during tough times defeats the purpose of investing because this is where the best opportunities are found--at the bottom. By the time investors feel certain about the markets and jump on the bandwagon of a recovering market, the best days (the days you get paid for bearing risk) are usually long gone.  Missing out on the best returns at the bottom of market cycles is a steep price to pay.  Missing out on the best days in the market, until an investor feels more certain about the markets, can be considered the "cost of certainty."
 

However, investing is not as easy as it appears.

 

 

There are some common misconceptions right now about investing.  

    
 

       > Misconception #1:  Blindly putting your money in stocks is a winning strategy.
 

Bonds have beaten stocks for the last 40 years.  Surprised?  Over the last 10-40 years, long-term government bonds have beaten the broader stock market in rates of return (Rob Arnott, "Bonds: Why Bother?" The Journal of Indexing, May/June 2009).

Does this mean that investors should rush and put all their money into bonds?  Not quite.  Relying on historical trends in this way usually hurts investors.  As William Bernstein says in his book The Four Pillars of Investing,  "High previous returns usually presage low future returns, and low past returns usually mean high future returns."  Investors get paid for being counterintuitive and going against the flow, but this is easier said than done.  

 

       > Misconception #2:  Most individual stocks make money over time.  

 

A study posted by Dimensional Fund Advisors (DFA) found most individual stocks lose money over time.  DFAs study shows that between 1980 and 2008, 25% of the stocks in the stock market were responsible for the market's gain over that period of time.  This study reflects the difficulty of designing and implementing a succeful investment strategy.   While the potential gains in the market can be very profitable over time, it takes a skilled approach to take advantage of the winning trends.   
 

 

 
The recent crisis in the financial system has revealed many things about our markets and economy.  One thing it  has revealed is that some of the widely used models of investing by the "pros" failed in this recent downturn because their assumptions did not adequately take into account the potential impact of unpredictable events (Joe Nocera, "What Led to the Financial Meltdown" New York Times Magazine, 01/04/09).

 

Many do it "yourselfers" are most likely getting taken for a ride as well.  In the calmer waters of previous decades it seemed easy to spot and take advantage of investment trends.  In this new era of volatility, our prediction is that the individual investor trying to do it on their own is going to get slapped around because they are using modern, yet already outdated, strategies that do not work in the new world of investing.

 

 

 

There's much fear about the future as investors wrestle with things like the enormous amount of debt accrued in the bailout, the potential inflationary consequences of all this stimulus, and concerns about the global leadership and status of the U.S. economy going forward.  Because of all the fear, investors might be tempted to make their decisions and then hope for the best.  This is not a winning approach to investing.

 

A winning approach is based on experience, good old fashioned hard work and a strategy to capture the opportunities while avoiding going down with the ship.  These are times of unprecedented opportunities.  Investors who have a strategy and a plan of action can experience great success as more opportunities continue to become available as those who lack the necessary skill and expertise exit the markets.  This is why it's a great time to be an investor.