The Miraculous 2009 Market Recovery

Last Updated Apr 30, 2009 5:04 PM EDT

I looked at my portfolio online today, as I do far too often, and saw something I haven't seen for a long time -- a slight gain for the year. What a great feeling! A far cry from the feeling I had when I looked on March 9, 2009, to see the stock market adding a 25 percent loss on top of the 37 percent loss from the previous year.

Right as the market was hitting bottom, I wrote "Bear Markets Suck But Don't Give In to the Pain." There, you might even detect the pain I was feeling in discussing irrational investor behaviors. Who knew then that the stock market was about to begin its fastest bull run since 1938? The only thing I knew is that investor instincts tend to lead us astray.

You may be wondering why the media isn't celebrating this incredible comeback. That's because the media measures the market as the S&P 500 index, which began the year at 903 and was still down 15 points when I wrote this. This common benchmark is easy to beat, since it doesn't include dividends or the rest of the US Stock Market. Using a real benchmark such as the Vanguard Total Stock Market ETF shows a small gain for the year.

My Advice
We never know where the market is heading in the short-run. Even as I finish up this article, the market is back in negative territory. Much as I learned while whale watching, the only way to avoid sea sickness is to ignore the motion of the boat and keep your eye on the horizon. Focusing too much on the ups and downs of turbulent seas will only have you running for the latrine. Keeping your eye on the investment horizon will prevent you from giving into the fear or greed that ends up taking your portfolio down the equivalent of a latrine.

Rebalancing your portfolio is the one method of market timing that actually works and makes you a true contrarian. If you've been doing it right and increased your stock exposure near the bottom, now would be the time to take some of these gains off the table. The doom and gloom in the March media was a good sign. Now that I'm seeing articles predicting Dow 10,000 by year's end, I'm getting a bit worried.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.