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These 5 Tips Are Better Than Any Prediction

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The last 10 years have been abysmal for many investors. Now that 2010 is fast approaching, however, most of us are looking for ways to put the past behind us and find a more prosperous future ahead.

With that in mind, you've likely already seen a huge number of predictions for the coming year and beyond. Yet whether those attempts to foretell the future come from people who've proven reliable in their past predictions or from less reputable sources, there's only so much weight you can give any look ahead.

Nine predictions from nine experts
It's for this reason that Foolish retirement specialist Robert Brokamp searched far and wide for a variety of expert opinions on where the economy and the financial markets are headed in the future. As you can read in the January edition of his Rule Your Retirement newsletter, Brokamp talked with nine different experts, including folks like ETF guru Richard Ferri and stock skeptic Rob Arnott, to get their views on whether the U.S. is destined to see an even longer period of stock market stagnation, as Japan has seen since its market peak in 1990.

There's no denying that their views are interesting -- and as you might expect, they span the spectrum from extreme pessimism to some surprisingly bullish arguments. Yet amid the various ponderings about what the next shoe to fall may be, I found the comments from investment manager Larry Swedroe to be the most useful. That's because rather than taking his own stab at exactly what the future would bring, Swedroe gave advice that was simple and useful no matter what happens next year.

You should do what you can do
In a nutshell, Swedroe reminded Rule Your Retirement readers to focus on the things they can control. Sure, you can make a lot of money if you make the right predictions about whether U.S. banks like Citigroup (NYSE: C  ) or Wells Fargo (NYSE: WFC  ) will suffer the same fate as Japanese banks, or whether precious metals will keep skyrocketing and reward investors in stocks like Silver Standard Resources (Nasdaq: SSRI  ) or Barrick Gold (NYSE: ABX  ) . But you don't have any power to actually make those predictions come true.

On the other hand, there are a lot of things you can act on with your investments. Here are five of them:

  • Make sure you're taking the right amount of risk with your investments. That means ensuring that you're not overextended and therefore vulnerable to downturns, as well as making sure you have enough risk exposure to earn the returns you'll need to meet your financial goals.
  • Diversify your portfolio so that you won't suffer huge losses when any one particular investment drops in value.
  • Don't pay too much for investments. There are always lower-cost alternatives, whether you're looking at index mutual funds over load funds or discount brokers rather than full-service premium brokerages.
  • Minimize the taxes you pay on your investments, both by trading less frequently and by using retirement accounts and other tax-favored investments.
  • Cut your household costs. That reduces how much wealth you need to accumulate, and thus your investments don't have to grow as much.

Each of these points gives you something to look at in your own portfolio. However, I think the one that most investors can improve the most is in the area of diversification.

Diversifying is a lot harder than you might think. In picking individual stocks, the temptation is always there to look at whatever happens to be popular at the time. Right now, for instance, turnaround stories like Ford Motor (NYSE: F  ) and Sirius XM Radio (Nasdaq: SIRI  ) dominate the attention of many investors. If you're not careful, you can spend all your effort following just a few stocks.

Now don't get me wrong: There's value in drilling down on a few companies to become a specialist in the way they work. But by doing so to the exclusion of all else, you risk missing out on opportunities in other sectors. Back in 2008, for example, energy investors were quite happy to stick with stocks from giants like Chevron (NYSE: CVX  ) all the way down to tiny companies like PHI -- as long as energy prices kept skyrocketing. When the bottom fell out of the market, though, so too did most of those stocks -- and suddenly, those industry experts found themselves without other ideas.

Don't fixate on the future
With all that's going on right now, it's fun to guess what will happen next in the financial world. But don't hinge your investing success on guesswork. By following advice like Swedroe's, you can take control of your financial life no matter what the future may bring.

Read Robert's full interview with Larry Swedroe, along with the predictions of all the experts he consulted, in the latest issue of Rule Your Retirement. Even if you're not a subscriber, you can get quick access with a 30-day free trial -- just click here to get started.

Fool contributor Dan Caplinger is officially out of the prediction business. He doesn't own shares of the companies mentioned in this article. Ford is a Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy got some new polish on its crystal ball.


Read/Post Comments (8) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 28, 2009, at 1:05 PM, 1crazyhorse wrote:

    I would never buy a product from any of the sponsors or companies that advertise here. I just couldn't trust the motive in which they choose to support such a corrupt website such as MF. It's jsut not right.

  • Report this Comment On December 28, 2009, at 1:40 PM, gointothetop wrote:

    This article was just another mass of babble saying absolutely nothing...

    "Sure, you can make a lot of money if you make the right predictions...But you don't have any power to actually make those predictions come true"

    What kind of silly comment is that??? If we had the power to make any predictions come true in the stock market we'd all be millionaires.

    "diversify your portfolio so you don't suffer huge losses when any one investment drops in value." Gee, I never heard that advice before. Bottom line is we must take some risks if we want to do well in the market, The key is to read a lot and be aware of what's going on and that won't happen reading silly general articles with obvious advice like this one. The best thing anyone can do if they are interested in investing is to get themselves a broker account at one of the low-cost brokers like Scottrade or Ameritrade for example and become educated themselves by paying attention to the market and read a lot. Also, Fox Business is a great channel. Paying a broker $300 to make a trade is foolish - highway robbery. Become educated and do it yourself. You'll do better in the end. Here's one to read up on.... SLV. Its a winner although its quite a roller coaster ride. Good Luck all.

  • Report this Comment On December 28, 2009, at 7:37 PM, hooooon wrote:

    This is the best article ever dished out by TMF, sounds Buffettish.

  • Report this Comment On December 28, 2009, at 7:42 PM, Maui808Gal wrote:

    While some of you may think that the advice and suggestions administered at The Fool isn't worthy of your time to read (though you do seem to think it's worth your time to complain about it....), some of us are new to investing and value it's content. In addition to it's value, it is entertaining as well. Yes, sometimes they are a little over zealous with their ads for other services. However, those services are of use to some of us and it is what they do...they offer their services. Yes, for a price. But don't you pay for food....gas....clothes..etc.?

    If you don't value or enjoy the information offered (or you just plain old know it all already...), then don't read it!

    Mahalo,

    Sharan

  • Report this Comment On December 28, 2009, at 10:07 PM, warrenrial wrote:

    Gointothtop, You are 100% correct, I could not have put it any better. Hope you make it to the top.

  • Report this Comment On December 28, 2009, at 10:41 PM, 1crazyhorse wrote:

    Kaka is new to investing. If he doesn't find a more credible source for investment strategy all he will have left in a handful of kaka. MF will have his cash or their corrupt side kick, Cramer will. He'll learn the hard way.

  • Report this Comment On December 28, 2009, at 10:42 PM, 1crazyhorse wrote:

    Kaka is new to investing. If he doesn't find a more credible source for investment strategy all he will have left in a handful of kaka. MF will have his cash or their corrupt side kick, Cramer will. He'll learn the hard way.

  • Report this Comment On December 29, 2009, at 4:34 PM, Maui808Gal wrote:

    CrazyHorse...or shall we just call you crazy...

    Apparently you need glasses...I don't recall stating the the Fools are my ONLY investment source. That would be foolish. However, the investments I've made based on recs from the services to which I subscribe have left me with handfuls (and handfuls and handruls) filled with lots of money. Thought, it is not the recs that I seek, but information, education, opinions, and a little bit of entertainment, too.

    I am not a guy...and how your got Kaka from Kahakaibum is beyond me...(hence...the need for your new glasses)

    Mahalo,

    BeachBum sharan

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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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