Scrooge's Take on the Stock Market

Investors are now enjoying a stock market that has almost doubled since the lows of March 2009, a very good thing to be sure. But how about we take a page out of Dickens' "A Christmas Carol," and revisit that bleak time for a moment, with me being all of the Ghosts - Past, Present and Future? We can all feel like the character of Scrooge in Dickens' book, where we learn some important lessons from painful memories.

And here's why keeping those painful memories fresh is critical to your investing.

Stock Market Past
It was March 9, 2009, when the stock market bottomed. Everyone was in pain and I was no different. There was panic in the streets, those of both Wall Street and Main Street, and even my wife and I were having conversations about rebalancing. What if the experts were right and we would lose the other half?

The truth is, it was the most difficult time in recent history to be a financial planner. I was as scared to death as any of the clients who called for assurances that the markets were bottoming out. I could only assure them of two things:

• Capitalism was not dead.
• If the market got worse, I was going down with them.

Stock Market Present
As we moved toward the present, at the market's bottom, I wrote a piece for Money Magazine entitled A Bear To Remember. It was intended to be a snapshot of those desperate times, with the thrust being that investors have very short memories, and that no good market plunge should go wasted. My cautionary advice was to hang on to the pain for its teachable value.

I suggested we write down our asset allocation goal and give it to a friend in an envelope marked "Open when the S&P 500 hits 1,200." Now we arrive at the Stock Market Present, and the time to open this letter. I mean, Goldman Sachs just predicted a 23 percent rise in the S&P 500 at the end of next year. We are all going to be rich, again!

Investment joy fills the holiday season. So why am I playing Scrooge and bringing up painful memories? Because we all know the story hinges on what happens in the future and, in this version, it's the Stock Market Future.

Stock Market Future
Unlike the Ghost of Christmas Future in Dickens' book, that knew exactly where Scrooge's current path would take him, the Ghost of Stock Market Future (that would be me), can't say the same. My crystal ball is on the fritz, but so is Goldman Sachs' crystal ball. The difference is that I know it.

That is not to say I can't offer any predictions, I can. I can predict something more powerful than the stock market - investors' behavior. If Goldman Sachs is right and the market goes up, investors will be buying. If they are wrong yet again, investors will be selling. Same goes for bonds, though I actually did make a prediction for next year that said the bond party is over.

But the Ghost of Stock Market Future can leave you with one more prediction which is, in the long-run, going against the herd behavior is a sure way to earning more than others.

Lessons from Scrooge
Not trying to ruin anyone's holiday joy here. I'm actually trying to bestow a holiday gift upon you to take into the New Year and apply to your investing decisions.

If you couldn't bear the Stock Market Past and sold after the plunge, be wary about getting back in. There's every possibility that you'll do the same during the next plunge. There will certainly be many market plunges during the next few decades, as there will be many bulls.

If you stayed in the stock market during the Stock Market Past, consider rebalancing now. Not because we know the future, but because we know sticking to an asset allocation works and is a sure long-term way to buy low and sell high.

Irrespective of what you did in the Stock Market Past, write down how you feel about the stock market today. Put it in an envelope marked "Open when the S&P falls below 900," and give it to a friend. Remember, friends don't let friends drop their nest egg.

Scrooge learned the errors of his ways. Though our investment errors are part of our instincts and not so easily changed, we can learn too.

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