Last Updated Jan 2, 2010 11:23 AM EST
- There will be a new investment bubble. Count on it! Despite the beat-down our economy has suffered over the last year or so, irrational exuberance is alive and well. This past decade alone had two bubble doozies - the dot.com bubble followed by the real estate bubble. You can be sure there will be at least one new bubble, and probably more, coming this decade. It's possible that we are already starting this decade with a growing gold bubble, but it may be too early to tell. That's the problem with bubbles - they are not so obvious until after they have popped.
- There will be new investment paradigms. Every bubble, as well as every over-reaction to a popped bubble, needs a new paradigm to support it. We had at least three such paradigms in the last decade. In the year 2000, cash flow no longer mattered in the "new-age economy." In 2007, it was okay to lend 100% on a home to someone without a job because real estate would never go down in value. Finally, in early 2009, capitalism was declared dead and the market would fall further. New paradigms will be developed in this decade to support the new bubbles. When these paradigms are criticized, the response for paradigm supporters will be, "this time it's different."
- Investors will follow what's hot. While predicting markets is hard, predicting investor behavior is relatively easy. Investors will buy after the investment has gone up in value and sell after the investment has collapsed. That's because of two human instincts - greed and fear. We see others getting rich in a bubble and greed makes us want to get in on the action. We get in just in time to see it pop and then fear takes over. We sell to protect what's left of our nest egg. Sound familiar? It should, because this is the cycle that is historically repeated again and again. Don't despair though, this could be the decade that you learn from history so as not to repeat it.
- Wall Street will flourish. Wall Street was definitely dragged through the briar patch at the end of this past decade. I admit that I never thought I would see the day that Lehman Brothers and Bear Sterns would go the way of the dinosaurs, or that AIG and other insurance titans would need a bail out. But that doesn't mean I'm ready to count Wall Street out. They will continue to invent new securities and products that seemingly give us return with minimum risk, and we will continue to buy them.
- Passive investing will beat active. I don't presume to know whether the market will earn 200 percent or stay flat over this decade. What I do know is that arithmetic will hold. For the next decade, market returns - costs = investor returns. Thus the way to beat most investors is to own the entire market with the lowest costs. Yet, as silly as it is, I also predict the active vs. passive debate will continue into this decade and beyond.
MORE ON MONEYWATCH:
Why it Wasn't a Lost Decade For Investors How to Protect Your Investments from Yourself Is Now the Right Time to Get Back Into The Stock Market? A New Exciting Investing Platform - Kapitall It's Not How Much You Pay in Costs, It's the Total Return That Matters An Interview with Ric Edelman - Is High Cost Indexing an Oxymoron?