Investors learn from year of bad choices in 2011

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To paraphrase Yogi Berra, it’s tough for investors to make predictions, especially about the future.

That was certainly the case in 2011 for investors whose portfolios were hurt by unforeseen developments – from Libya to Japan to Europe to Washington.

Here are some investing lessons from this year:

• DON’T COUNT OUT TREASURYS

Did you follow the lead of star bond investor Bill Gross of PIMCO and dump Treasurys because the outlook was bad for U.S. debt? Oops. You lost out on good returns.

Treasury prices rose sharply starting in February as the weaker U.S. economy and Europe’s debt crisis sent investors looking for safe investments. Yields on bonds move in the opposite direction from their price. The strong demand for U.S. debt sent the yield on the 10-year Treasury to a record low of 1.71 percent in September. It was 2 percent Friday.

How to explain bonds’ unusual staying power for investors? Safety trumps all, says Gary Thayer, chief macro strategist for Wells Fargo Advisors in St. Louis.

“During uncertain times, investors are willing to accept a low rate and worry about what rates will be for the long term later,” he says.

• NETFLIX IS NOT NIRVANA

Be careful with hot stocks -- you can get burned. Netflix Inc. (NFLX) lost nearly 80 percent of its value the second half of the year. That was after it rose nearly 400 percent in 18 months. It peaked at $304.79 in July before plunging as low as $62 this month. Another soaring growth stock, Green Mountain Coffee Roasters Inc. (GMCR), lost two-thirds of its value in eight weeks after nearly quadrupling from January to September. Both stocks fell on negative news about the companies.

• GOLD ISN’T SUCH A SAFE HARBOR

The price of gold reached a record $1,891.90 an ounce in August. At that point, it was up 33 percent for the year. Many investors believed gold was a safe place for their money. But speculative buying played a big role in its rise, and that left gold vulnerable to a sell-off. And sure enough, by Sept. 29, it had fallen 15 percent from its high to $1,608.50. It’s still up 13 percent for the year. It closed Friday at $1,604.70.

• INTERNATIONAL INVESTMENTS CAN IMPLODE.

Many investors ignored warning signs about Europe a year ago. That came back to bite anyone who was heavily into European or international stocks. The Vanguard European Stock Index Fund (VEURX) lost 30 percent of its value between April and late September as the sovereign debt crisis boiled over. And international stocks overall, as measured by the Vanguard Total International Stock Index Fund (VGTSX), fell nearly as much during the same period – 25 percent. Both are down double-digit percentages for the year.

That doesn’t mean you should ignore international stocks entirely in your portfolio. If you have an investing horizon of five to 10 years, this might be a great time to go into them.

“International diversity is important in the long term,” says Mark Luschini, chief investment strategist for the Janney Montgomery Scott investment firm in Philadelphia. It’s just that following the prescription without caution hurt in 2011.

• IPOs ARE A GAMBLE.

It’s wise to avoid a stock that has just gone public unless you’re fortunate enough to buy at the offer price (before it hits the open market). This year’s initial public offerings showed again that new stocks tend to soar on Day One, buoyed by all those who got in early, and then stall. Several stocks that enjoyed a big first-day “pop” in 2011 are now back below their offering prices.

—Groupon Inc. (GRPN): First day, up 31 percent. Since then, down 13 percent.

—LinkedIn Corp. (LNKD): First day, up 109 percent. Since then, down 32 percent.

—Pandora Media Inc. (P): First day, up 9 percent. Since then, down 43 percent.

—Zillow Inc. (Z): First day, up 79 percent. Since then, down 36 percent.

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soldout
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soldout 12/24/11 - 12:46 am
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Market timing is a good

Market timing is a good solution. Just using the 70 day ema on tyx would have kept you on the right side of bonds for several years. There is a company called timertrac that tells who the best timers are for the market. The market can be timed with any good trend following system. There are two keys in investing; spread your money between 5-10 methods or advisors. That is a help if one turns out to be a crook or one is a terrible method. Diversity between systems is better than diversity in the market. The key factor in all systems is draw-downs. That means how much you lose from your high at any point. If the draw-downs are too much you won't follow the system. You can also combine systems to reduce draw-downs with half following one system and half another. System agreements are also a good method. Check out two corner timing and check out his hemi system. He has a good five year track record and an excellent web site for testing approaches. Any advisor who tells you can't time the market is just not old enough or has gotten wrong training. Years ago all I knew was "buy in the winter and sell in the summer" and that allowed me to retire at 51. Last, if you don't understand it don't put money in it and watch American Greed on CNBC for at least six months so you can tell who the crooks are.

dichotomy
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dichotomy 12/24/11 - 11:59 am
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I don't favor market timing.

I don't favor market timing. I'm not saying it cannot be done but you, or somebody you hire, has to be really good, and lucky, to do it successfully. I buy solid American stocks that pay dividends and I buy corporate bonds. During the crash of '08 the market value of my stocks and bonds dropped about 30% but the interest and dividends kept coming in. Didn't miss a dime of income. I took the opportunity to buy lots more of the same stuff that I had....cheap. I did not panic and I did not sell anything. The same stocks and bonds that I had in '08 are now back above where they were before the crash and the dividends have actually gone up a little. This year to date I am up 9.2% which is nothing to sneeze at. You can make a lot of money if you can time the market. You can also lose a lot of money.....and get ulcers either way. Buy solid dividend paying stocks and investment grade bonds, don't worry about the up and down cycles, and just sit back and wait for the checks to come in. Heck, I got a headache just reading soldout's advice. JMHO

soldout
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soldout 12/29/11 - 10:15 am
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good comments dichotomy and I

good comments dichotomy and I agree with the dividends approach too. Most bail out when things go down and can't handle the draw-downs. You have a method and you stay with it which is so good. That is key; staying with your method. I didn't know any better when I did winter summer so I stuck with it. You stick with what you know and you have done well. I like the 70 day ema on tyx and I stick with it and beat most of the bond experts. The day to day timing is harder but I enjoy it with it's research etc. I have often thought about doing some dividend stocks but my main goal is to help these folks with they 401Ks and really grow them over the long-haul.They need a way to keep calm and buy and hold folks in 401Ks don't seem to do that. When 401Ks make almost nothing for ten years because of no timing they need some help. If you read this why not give folks a list of the dividend stocks you like.

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