Stock Market Anniversary

It's the first anniversary of the stock market's slide to 12-year closing lows. I remember appearing on The Early Show during the darkest days last year and reminding viewers that the storm would pass and there would be light. I just didn't know how much light.

This morning I was happy to return to The Early Show this morning to report on the stock market's progress with Maggie Rodriguez.

Given that the traditional gift for the first anniversary is paper, how about these paper gains?

• Dow: +61% -- the best 52-week period following a bear-market low since February 1933
• NASDAQ: +84%
• S&P 500: +68%

It's hard to recall just how dark it was a year ago, when predictions of Dow 5,000 were prevalent. I remember one financial journalist confiding in me that he had moved his entire portfolio to treasuries. I'm sure that he would brag that he got back in, but that's like a gambler telling you that net-net, he beats the house. Not very likely!

The most frequent question that I field about the stock market recovery is why did it happen? Much of the stock market's gain has been driven by liquidity, or money that was injected into the system. Consider the following government measures: $700B in TARP; $800B stimulus; $1.25T in Fed purchases of mortgage-backed securities; and another nearly $1T in other goodies. The massive cash infusion helped stabilize the economy, which allowed earnings to recover. Also, with interest rates at hovering at multi-decade lows, all of this money needed a place to go--enter the stock market.

Before you break out the champagne, remember that the S&P 500 is currently at the same level as 1998 and the index is still 27% below its 2007 high of 1565. That's why I always come back to my tried and tried advice for navigating all phases of market cycles.

• Don't fall prey to your emotions: it's never as good OR as bad as you think. That means that a year ago, selling because you were panic-stricken was not rational. Today, you shouldn't buy just because stocks are up 60% in a year. Guard against fear and greed!
• A way to keep your emotions in check is to create a game plan and take a risk assessment quiz. Given the ups and downs of the past year, you're likely to know exactly how you felt about the swings, which makes this the perfect time to do it. Most retirement plans have online risk tests.
• Once you understand your risk tolerance, you ready to invest in a diversified portfolio. Did you know that from 2000-2009, a diversified portfolio of stocks and bonds BEAT a riskier portfolio of 100% stocks? And I bet those diversified folks slept better too.