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The Key to Investing Better in 2010

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At least for most stock investors, 2009 was certainly a happier year than 2008 was. But if you're not satisfied with the returns you earned from your investments this year, now's a great time to take a closer look at your investing strategy and figure out what changes you need to make -- if any -- to improve your long-term returns going forward.

What worked and what didn't
On the surface, you might think that investors really have nothing to complain about. After all, just as nearly everything lost value during the financial crisis that made the big bear market in stocks that much worse, so too has nearly every asset class recovered a huge portion of their losses.

Yet even among the general gains, you'll still find a lot of variation between the winners and the losers. For instance, if you owned technology stocks this year, you've probably enjoyed some amazing gains, as tech bellwethers like Apple (Nasdaq: AAPL  ) and Microsoft (Nasdaq: MSFT  ) have put up great numbers during 2009. Similarly, materials stocks such as BHP Billiton (NYSE: BHP  ) and Dow Chemical (NYSE: DOW  ) have also outpaced the broader market.

A number of themes, however, didn't work so well. Blue-chip stocks that did an extraordinary job in protecting wealth during the bear market, such as ExxonMobil (NYSE: XOM  ) and Wal-Mart (NYSE: WMT  ) , simply haven't participated in the rally this year. In general, many stocks in the more defensive sectors, such as consumer staples giant Procter & Gamble (NYSE: PG  ) , have been largely left behind by the rally, which has favored more speculative, less secure companies.

Stick with the right plan
Results like these can make you second-guess your investing plan. When doing the "right" thing gets penalized and those who take what appear to be ridiculous amounts of risk get rewarded for their questionable investing behavior, it's hard not to get discouraged.

Remember, though, that investing is a marathon, not a sprint. For every investor who timed the recovery perfectly and rode stocks up for three- and four-baggers, there's someone who was a longtime shareholder of those same stocks -- and those investors in the latter group are still waiting in many cases to get back to even, despite those outsized gains.

If you did everything you're supposed to do, then you shouldn't focus too much on any single year's returns. But before you give yourself a free pass for lagging the market in 2009, consider whether you did any of the following:

  • Giving in to emotion. If you strayed from your usual investing strategy -- either by taking money out of stocks or by choosing to stop making new contributions to retirement accounts or savings programs -- then you need to assess the results coldly and objectively. If the decisions you made in those areas cost you money in the form of missed opportunity, then you need to reassess whether your current asset allocation accurately reflects both your comfort level and what you need to earn to stay on track for a comfortable retirement.
  • Following performance. There's a fine line between recognizing a good investment idea and being the last member of a herd of other investors. If you found yourself buying big-gainer stocks only after they'd seen some monster moves, then you may be chasing performance -- a mistake that could cost you a huge amount over your lifetime.
  • Failing to rebalance. A lot of investors forgot one thing when the market soared to new records back in 2007: They didn't rebalance their portfolios. As a result, because the gains earlier in the decade had swelled stock allocations among many investors, they lost correspondingly more money when the stock market collapsed.

If you made any of those mistakes, don't panic -- it would take superhuman discipline to stand completely firm during everything we've faced in the past year. Nevertheless, one goal should be to identify what caused you to make those mistakes, so that the next time those same conditions occur, you'll be ready and able to avoid repeating the errors.

Think long-term
The nice thing about investing is that even though long-term results are what matter most, you can still give yourself a fresh start every year. If you're not happy with your investment returns lately, resolve to do more to support your investing efforts in 2010. With a little work, you can make the most of your assets and be a better investor than ever in the New Year.

Have you always wanted to have seven digits in your net worth? Let Chuck Saletta show you the easy way to become a millionaire.

Fool contributor Dan Caplinger has had a good year so far but knows there's always room for improvement. He doesn't own shares of the companies mentioned in this article. Apple is a Motley Fool Stock Advisor selection. Microsoft and Wal-Mart are Motley Fool Inside Value recommendations. The Fool owns shares of Procter & Gamble, which is a Motley Fool Income Investor pick. Motley Fool Options has recommended a diagonal call strategy on Microsoft. Try any of our Foolish newsletter services free for 30 days. You've never heard a better version of "Auld Lang Syne" than the one the Fool's disclosure policy sings.


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  • Report this Comment On January 02, 2010, at 5:10 PM, cmm3 wrote:

    Psychological factors play a big role.

    But the key is to invest properly and invest in the right markets. Check out http://eafepro.com - EAFE Pro will show you how to invest and where FOR FREE.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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