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Lessons from 2009: Planning Tips and Investment Myths

Each year, the markets provide reminders of the importance of prudent investing. 2009 was no different. But these lessons can be quickly forgotten if we don't take time to remember them. (Especially when the markets are doing well.) This week, we'll look back at the lessons we learned (or relearned) in 2009.

Those that Fail to Plan, Plan to Fail
The investors most likely to maintain discipline in the face of the bear market were the ones who:

  • Had a well-developed plan, one that anticipated bear markets
  • Didn't take more risk than they had the ability, willingness or need to take
If you saved consistently, rebalanced in good and bad times and didn't retire too early, you were likely in a good position to weather the storm. Those who didn't have a plan were far more likely to fall into the group of panicked sellers.

Sell in May and Go Away Is the Financial Equivalent of Astrology
One of the more persistent investment myths is that the winning strategy is to sell stocks in May and wait until November to buy back. It's true that stocks have provided greater returns from November through April than they have from May through October. However, there has still been an equity risk premium from May through October. In 2009, you would have missed out on the following returns by following the "Sell in May and Go Away" strategy:

  • S&P 500 Index -- 20.0%
  • MSCI EAFE Index -- 31.2%
  • MSCI Emerging Markets Index -- 39.8%
The most basic tenet of finance is that there's a positive relationship between risk and expected return. Investors believing that stocks should produce lower returns than Treasury bills from May through October must believe that stocks are less risky during those months -- a nonsensical argument.

Follow the series: Lessons from 2009

  • Part one: Planning Tips and Investment Myths
  • Part two: Rebalancing and Investment Horizons
  • Part three: Unexpected Bursts and Staying Invested
  • Part four: Refreshers