Three main lessons from the Crash of '08

If you are upset about what’s happened to your portfolio, that’s in the past and we must now look forward. Here are a few lessons to help you consider what to do next.

1. Get Your “Sleep-At-Night” Allocations Right. The most important investment decision we make is what percentage of our nest egg to put into cash and bonds.

Everyone today wishes they’d put 100% of their money in cash or bonds. But bond investors shouldn’t sleep as well as they think — the protection comes at a very high price. Bonds provide the lowest rate of return and over the years. Inflation eats away a lot of the value of the monthly income. From 1925 through 2003, U.S. bonds only appreciated 5.4% per year, or 61 times, while stocks appreciated nearly 10.4% per year, or 8,000 times.

Stocks are volatile, but over long periods you get paid for the sleepless nights. You just need the time to wait out these markets. Money you need for the next five years should be in bonds or cash. The panicked sellers didn’t get these allocations right. If you’re 50 years old and lamenting over the equity values in your 401K, remember, you’re not allowed to touch it for 10 years anyway. That’s a long time!

2. There Is No Oz. Sick of hearing the fortunetellers and soothsayers on CNBC predict what’s going to happen to XYZ stock, the economy, unemployment rates and any other future events? Let’s take it a step further. If you’re in mutual funds or have a financial advisor picking stocks or funds, why are you paying someone to predict the future for you?

Repeat after me: There is no Oz. Wall Street depends upon you believing that it can help you navigate through uncertainty when in fact it can’t. The fees charged by your broker and the mutual funds you’re in will siphon off 50% of your nest egg over 15 years without you knowing it. Since there’s no Oz, put together a portfolio of ETFs and index funds that charge .2% per year. If you can’t do it, find someone who will for a fixed yearly fee. You’ll have twice as much money when you need it.

3. Rebalance. Now more than ever. The fortunes of tomorrow will be made from today’s decisions. Want to participate? Then rebalance your portfolio. A portfolio that began 2008 with 50% U.S. stocks and 50% in bonds would be today, about 36% U.S. stocks and 64% bonds and down 17.5%. That’s if no one was trying to be a hero by stock picking and market timing.

Rebalancing means getting your allocations back to 50/50. But you have to sell 20% of your bonds and use it to increase your U.S. stocks by 40%. History says you’ll be rewarded. But it’s hard to do. Perhaps Warren Buffett’s recent op-ed in the New York Times will make it easier to consider buying stocks.