The market went down, and some ran (they always do).

And then it went down more, and more ran (”this time it’s different!”).

Then it went up.

So, how will you invest now?

And more importantly, what was your plan back then?  How did it hold up?

Ready to learn something about yourself that will affect your investing philosophy and style for the rest of your life?  Let’s take a careful look at the last two years with respect to your portfolio - a ride through unprecedented times.

Earlier in 2009, it was a scary and dark time in the markets.  There was so much uncertainty that I suggested you review your financial worst case scenario.  No one knew it at the time, but it was actually the beginning of an excellent run in the stock markets (DOW JONES up about 30%).  In the following months, the financial industry came out of it’s total eclipse, credit markets began to open up, and portfolios began their turnaround.  But how did YOU fare?  It all depends on the actions you took in those critical few months.  30% up doesn’t matter if your position was primarily “fetal and 100% in cash“.

The events of 2008 and 2009 provided a rare chance to take a real look at your risk tolerance.  Did you end 2007 saying “I’m young so I’m an aggressive investor and can handle 100% in stocks”, only to end 2008 by selling everything, withdrawing the cash and going to sleep each night clutching every last dollar bill?  Maybe you felt like doing that, but hopefully you didn’t follow through.  What is important is that you look back at those feelings, how they affected your actions, and how it impacted your financial situation.

If hindsight reveals that you made mistakes, maybe it shows you didn’t have a plan, or didn’t stick by it.  I (luckily) stuck with my investing plan of staying in the market, continuing my regular investments, and re-balancing against my asset allocation, and it worked out for me… but it wasn’t without some strife!

I had a discussion with a colleague about his investing strategy in the heat of the mess, in early 2009.  I explained my (simple, well understood) strategy of regularly investing and re-balancing my portfolio, and he said “but don’t you think something different is happening here?”  He could not believe that I was “doing nothing”.  Given he’s a pretty smart guy, this was a gut check for me.  But in the end I realized it: sticking by your asset allocation and investing plan IS DOING SOMETHING.  In fact, it’s a strategy that’s been proven time and time again to work in any market scenario.

Psychology can have a profound impact on your investing success.  The best way I’ve found to combat the roller-coaster that is the market is to have a plan.  What is your plan?  What did you learn about yourself in the last two years?  How will you invest now as a result?

If you need help creating an investing plan, I recommend the following:

• Learn about asset allocation.  Start with this article from about.com.
• Decide on your risk tolerance.  See my post on the topic for some ideas.  The book below will offer some help as well.  Don’t obsess over getting this exactly right the first time, you can always adjust it as you go!
• Read The Smartest Investment Book You’ll Ever Read by Daniel Solin, which will tell you everything you need to know about investing in index funds, buying the right funds, setting your asset allocation, and rebalancing it.  It’s an excellent read and not that long or technical.  Learning the simple principles covered in this book will change your investing future forever - for the better.
• Setup automatic investments - this is the best way to keep your plan on track despite your procrastination and forgetfulness.  You should start by maximizing your 401(k) contribution at work (to minimize your income taxes), and then investing outside that account in a regular brokerage account. Just make sure that your automatic investments aren’t costing you fees - most brokerages (like Fidelity, Vanguard, Schwab) don’t charge for automatic investments.
• Check your asset allocation annually, and rebalance.  Remember to not watch your investments too much!

A parting thought - having an investing plan is not the whole story - make sure you have a life plan as well, with good financial goals.  Know WHY you are investing.  Take a look at my original posts on how to do it.

photo: crystaljingsr

[First post of the year - work has been crazy lately, but I still intend to post at least once per month, with my goal at twice.  Thanks for reading and commenting!]

photo by emdot

These are tough times.  Everyone seems to be trying to save a little more, and spend a little less.  Watch out though, sometimes that ‘deal’ ends up costing you more than you think.

“Save money faster with double cash back.” ~HSBC credit card rewards ad

“It’s ok, it’s a tax deduction!” ~stupid person

“Buy two, get one free.” ~Walmart

Do you really need two?  or three?  Do you realize that a tax deduction is only a small discount? (at most equal to your marginal tax rate, and often much lower, as in the case of meals)  Are you starting to look for houses so you can get your $15,000 piece of the stimulus package?  Do you spend on credit cards more freely because you know you are getting rewards?

I call all of this “going broke saving money”. It’s very easy to fall into this trap.  I saw the HSBC ad above walking home from work today - man that pisses me off.  Credit card companies can really be vultures sometimes.  Always try to make purchasing decisions based on need, and then evaluate prices accordingly to get the best deal.  Think of the money saved or rewards earned as a bonus.  I guarantee you’ll be spending less money overall.

And please don’t buy a house unless you need a house, you find a good deal, and you have the money. Something is very wrong with your math if an extra $15,000 makes a house affordable.

Seen any other idiotic ads or have a story when you spent too much but didn’t realize your mistake after?  Leave it in the comments!

Money-wise, it’s been a tough year for almost everyone.  One of the many problems with widespread economic distress is people start cutting their spending in the fastest possible ways - unfortunately that often means chopping the annual charitable donations.  This year, the problem is immeasurably worse, since the big guys are toning down donations as well.

So this post is just a reminder that charities’ needs don’t go away in times like these.  If you give to charities regularly, good for you - try not decrease your donations this year especially.  If you haven’t given to charities before (or already spent all your savings on holiday presents for your friends and family), consider that even a small donation of $10, (the cost of a short cab ride or lunch at work) can help make a difference in other people’s lives.  Pick a cause that has some personal meaning to you and then make an impact on it. Check out justgive.org if you need some ideas.  And remind you friends to donate as well - lots of little bits can go a long way (for an example of this, see Apple’s revenue from iTunes where people are spending $.99 at a time).

If you work at a company, don’t forget that many corporations match donations.  You can often double your impact just by filling out a quick form.  Check out your HR website.

You have a couple days left to get your donations completed before 2009 sneaks up on us, so if you want a tax deduction this year, take care of it asap.  But if you read this after 2009 begins, don’t wait until December next year - charities have needs all year long.

Got a plug for a charity that means a lot to you?  Leave it in the comments…