The Year of Living Dangerously

12/17/2009 2:34 pm EST


Howard Gold

Founder & President, GoldenEgg Investing

Can you believe the year we’ve just had?

We entered 2009 staring into the abyss. Now, after a remarkable rally and with growing signs of economic recovery, cautious optimism has taken hold.

Not that we don’t have big problems—high unemployment, a gargantuan budget deficit, you name it—but at least now it doesn’t look as if the world is going to end tomorrow. Maybe next year. That’s progress.

In 2009, this column made fewer market predictions than in the past. Maybe I felt burned by some of the mistakes I’d made in 2008, or maybe the market was just too scary to outguess.

But in reviewing this year’s columns, I found that I focused more on big themes, particularly on the plight of individual investors, who need all the help they can get. I did make some market calls—some good, one very bad—which I’ll review later.

The beginning of the year was marked by the deepest gloom as the world still reeled from the collapse of Lehman Brothers and governments’ rescue of the financial system. Talk of a second Great Depression was rampant. You needed a machete to cut through all the fear.

This column, while avoiding alarmism, laid out some of the reasons for caution—themes, I might add, that became the conventional wisdom just months later. In early January, I wrote that the “new austerity” was for real.

“Count me among those who view this as…a fundamental shift in mood and psyche, not only here but around the globe,” I wrote. “Consumers have no choice.”

That still looks true—except maybe in China, Indonesia, or Brazil.

I also warned early on about a ticking tax time bomb—especially from state and local governments.

“The real danger to your wallets,” I wrote, “comes…from cash-strapped states and municipalities, which are in their worst shape fiscally in decades.”

The states’ fiscal condition has gotten only more dire, and the cascade of tax and fee increases and service cuts has only just begun.

This column also was among the earliest to write about a “jobless recovery.”

The sources of potential job growth in the US, I said, were very limited.

“US-based multinational corporations are shrinking their US workforces…while expanding dramatically overseas,” I wrote. “And the companies of the future are far away from their prime job-generating years…”

Regrettably, that looks even more true today, with unemployment now in double digits and the Obama administration desperately looking for policies that could quickly spur job growth.

When markets plummeted, many individual investors watched with horror as their dreams of financial security and a comfortable retirement went up in smoke.

This column chronicled their plight with empathy and tough love. I reviewed some of the huge mistakes many investors had made over the last few years and asked the hard question: “Do individual investors really know what they're doing?

“After speaking with thousands of investors for more than a decade, I've reluctantly decided that many do not.”

And yet, despite having gone through a “lost decade” for stocks, I found some strategies had worked a lot better than others. In several columns, I pointed out some simple approaches that would have left investors with manageable losses, maybe even some gains.

In a May column, “It Wasn’t a Lost Decade for Everyone,” I asked the Vanguard Group to test 14 different portfolios over the preceding ten-year period. The key to success, I found, was how much you had invested in bonds. “During the ‘lost decade’ for stocks, bonds did their job,” I wrote.

No wonder investors have been piling into bonds all year, despite the big stock market rally, as they seek to lower their exposure to equities. “Like American consumers, US investors have hunkered down and “reliquified” their assets to reduce risk,” I wrote.

But most of them aren’t embracing more active trading, despite the siren song of some gurus that “buy and hold” investing was dead. In a June column, I cited voluminous research that showed abandoning “buy and hold” for active trading was usually a terrible idea.

“Maybe the underlying problem was just that people bought and held the wrong things—they put too much in stocks and not enough in everything else,” I wrote. 

I also challenged the conventional wisdom that holding too much cash could cause investors to run out of money. Again, doing some original research, I found that “investors can hold as much as 40% of their assets in cash during retirement and still not outlive their money.”

As the markets began rallying in March, some investors’ thoughts turned away from cash and to stocks again, while disbelief in the rally was—and remains—rampant.

Although I’m still skeptical, this column has cited some advisors who have good track records and turned bullish as the rally unfolded, including Dan Sullivan and Ralph Acampora.

But starting in August, I warned that the market looked a little frothy.

“This market has come a long, long way in a short, short time. It’s much pricier than it was back in March,” I wrote. “Selling some financial stocks now is a no-brainer.”

A few weeks later, I suggested unloading some retail stocks, too.

Since then, financial and retail stocks have trailed the Standard & Poor’s 500 index.

But unfortunately those good calls were counterbalanced by a truly bad one: In March, just before the stock rally started, I waved the American flag for the US dollar, predicting “a stronger dollar for longer than people expect—at least for the next year.”

That turned out to be the high-water mark for the greenback, as investors once again embraced risk and the sinking dollar became fodder for a new “carry trade” that has pushed markets higher. The US Dollar index, which stood at 89 then, now trades below 78—after a nice rally. Oh, the agony!

The moral of the story—and the whole year—is that we all make mistakes, so we shouldn’t bet the farm on any one scenario.

The last two years have taught us that we need to be truly diversified and make active bets only with small amounts we can afford to lose. That’s a lesson that will stand us in good stead in 2010—or any year in the future.

Have a happy holiday season and a healthy and prosperous new year. This column will return in January.

Howard R. Gold is executive editor of The views expressed here are his own.

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