The late 1990s culminated in the biggest speculative bubble since 1929 and the worst bear market since the Great Depression. Below is a summary of seven lessons that investors have learned, often the hard way, during the 2000-02 bear market:
Do Business With Companies You Can Trust--Although investor confidence and public trust have been badly bruised in recent years, it is still important to trust three things: 1. companies that issue publicly traded stock, 2. the U.S. economy, and 3. one's ability to make good decisions. If you can't get over this hurdle of trust, you won't be successful as an investor.
Don't Assume You Can Out-Think the Markets--Market timing (i.e., trying catch the highs and lows of the stock market) is a common financial error when the fact of the matter is that you can't predict how stocks will perform. Many people call it "tactical asset allocation" but it's really market timing." It is also important to periodically rebalance your portfolio to its original target allocation. This means selling when others are buying and buying when others are selling. Going against the market is difficult emotionally, but necessary to get back on track.
You Can't Be a Successful Investor Without a Plan With Reasonable Expectations--"Accumulating money" is not a specific financial goal in and of itself because it is not focused enough. People need to have a game plan that is tied to specific financial objectives. Earning a return sufficient enough to accomplish an objective is the true measure of investment success, not "beating the market." In addition, do not expect the stock market to perform in predicable patterns. You can't assume what has happened will happen again.
Live Below Your Means--Spending less than you earn creates financial freedom. Many people erroneously stopped saving in the late 1990s, with five consecutive years of 20%+ stock market returns, because they felt that the market would do their saving for them. In addition, investment expenses matter, especially in a down market. If an investor earns a 6% return on a mutual fund that charges a 1.5% expense ratio, they have sacrificed 25% of their return. The only certainty about investing is you know what you're paying and low cost wins.
Balance and Diversify--Balance is owning stocks, bonds, and cash. Diversification is owning different types of each investment. Balance always makes investors feel bad in the short run because, by definition, you are under-performing the best asset class. Of course, there is no way to identify winners and losers in advance. One way to diversify is with a "core portfolio" of broadly diversified, low-cost mutual funds.
Be Skeptical of Investment Fads--Recent examples include day trading, the dot com bubble, and hedge funds. There have been investment fads in every era where people lose their skepticism and get caught up in market hype and euphoria.
Don't Pay That Much Attention to Market News--Checking investment values daily increases the temptation to do market timing. When you are investing for the long term, daily market information is not important. Daily market trading reports are irrelevant to anyone but professional traders.