It's always unseemly to talk about money at a time of tragedy. That said, when bad times hit, we can often learn great lessons. With the economic and investment impact from the Japanese earthquake still emerging, there are already clear messages for investors.
These are tried and true -- sorry to be repetitive, but they work!
- Don't fall prey to your emotions: it's never as good OR as bad as you think. I worry that the recent Middle East unrest, combined with the Japanese earthquake will spook investors out of the market. That's what happened last year, after the European debt crisis and Flash Crash. As a result, too many investors bailed out of the market and missed another solid year of returns. Guard against fear and greed-they are powerful emotions!
- Avoid individual country bets: yes, it would have been great to have invested in the Sri Lankan stock market last year (up 96%!), but most investors are better off selecting international/regional mutual or exchange-traded funds to gain international exposure. It's kind of like the idea that individual stocks are rarely worth the risk.
- Invest in a diversified portfolio: Did you know that from 2000-2010, a diversified portfolio of stocks and bonds BEAT a riskier portfolio of 100 percent stocks? And I bet those diversified folks slept better too.
- Don't Try To Catch A Falling Knife: This is an old Wall Street chestnut, that reminds us that even if we feel compelled to buy Japanese stocks right now, it's far too early to understand the ramifications for the disaster. Buying Japanese stocks right now is akin to "catching a falling knife."
- Expect the Unexpected: When I went to sleep last night, almost everyone was predicting a horrible day for global markets. As the dust settles on the first full day of trading, there were actually some surprises: European markets were down, but only by around 1 percent. The hardest hit were insurance companies, many of which are based in Germany. Stocks in China and Korea gained ground, as investors bet that those countries may fill the void of Japanese manufacturers that are temporarily off-line.