Another Year of Surprises

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Welcome to 2011. You would have to be a mental magician to remember exactly what you were thinking a year ago today as 2010 popped its head up over the horizon. What I recall is that most investors, rocked by the disaster of 2008 and unconvinced by the partial rebound of 2009, were feeling pretty skittish going into 2010. That uncertainty and fear kept lots of money on the sidelines over the past year. That reluctance cost a lot of people a lot of money.

As it turned out, 2010 stacked up as a handsome year for investors, with healthy advances in a variety of asset classes. For instance:

Gold (GLD) Up 27%

Real estate (VNQ) Up 28%

S&P 500 (SPY) Up 15%

These are nice returns, but I don’t recall lots of convincing predictions a year ago for these results to materialize. Nor do I recall clear warnings that other asset classes would lag. For instance, bonds floundered. iShare’s bond ETF, National Municipal Bond Fund (MUB) was down .2%.

Markets results are a surprise every year. Trying to pick the one heroic asset class, stock, or hedge fund manager that will rise to the top can be a costly frustration, and an unnecessary one. It is much easier, and I think much wiser, to own a diversified portfolio that taps the potential of many asset classes over many years.

New Years resolutions

I hope you won’t find it tedious that the resolutions I suggest for investors today are essentially the same as last year and the year before, and next year too. I believe that good strategy doesn’t change based on day-to-day market results, economic reports, or pundit proclamations. Here’s my suggested approach for the new year (and ever after):

  • Diversify: Hold a range of asset classes, with the mix determined by your specific goals and risk tolerance.
  • Cut costs: Take advantage of the low expenses and tax efficiency of index ETFs. A basis point saved is a basis point earned.
  • Forget the crowd: Don’t worry about what your neighbors, colleagues, and in-laws are holding or the hot tips they’re anxious to share with you. Build a custom portfolio that’s right for your personal, professional, and family priorities.

What are your resolutions for the new year? What are you doing in 2011 to promote the financial future you envision for your family?

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