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What a Difference 2 Years Makes

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On this date in 2009, at the worst point of the financial crisis, few investors could have imagined that the stock market could recover as strongly and quickly as it has. Two years later, the danger that investors face is much more dire: that we could forget all the hard-earned lessons that the crisis and the impact it had on financial markets around the world taught us.

A complete turnaround
Back in early 2009, just about nobody was excited about stocks. After a brief recovery from the lows of November 2008 immediately following the meltdown in financial stocks and the ensuing government bailouts of banks and automakers, the stock market quickly started dropping again as 2009 began and proceeded to plummet an additional 25% before finally hitting bottom.

The experience was humbling for investors, as many long-held strategies didn't seem to work. Stocks weren't the only assets to lose a lot of value; commodities had begun plunging as oil speculation evaporated, sending the price of oil down from more than $145 per barrel to less than $40. Outside the ultra-safe Treasury arena, many bonds didn't do a good job of holding their value, as the credit crunch brought into question the very viability of the capital markets as a financing mechanism. Treasury bill yields even went negative for a short period of time as desperate institutional investors were willing to do whatever it took to ensure they'd get their money back.

Now, though, the picture is completely different. Stocks have roughly doubled from their 2009 levels as a massive relief rally took hold and has never truly let go. Many companies that were left for dead, including Las Vegas Sands (NYSE: LVS  ) and Dollar Thrifty Group (NYSE: DTG  ) , have not only survived but thrived as low interest rates and government pumping of liquidity into the financial system gave capital-hungry businesses a way to get the money they needed.

And with the immediate threat over, ordinary investors are tiptoeing back into the market. With alternatives like savings accounts and bank CDs still not paying much in interest, investors looking for income have little choice but to head for riskier investments such as dividend-paying stocks and corporate bonds.

Looking forward to 2013
With two years under our belts since the market meltdown, the key test you face is how you'll deal with the next two years. Expecting a repeat of your experience from the past two years would almost certainly be a huge mistake.

Most importantly, you need to realize that the easy money in this bull market has already been made. Ford (NYSE: F  ) went from less than $2 per share to its current price of more than $14 largely by proving to its shareholders that it wouldn't need the same government bailouts that competitors General Motors (NYSE: GM  ) and Chrysler took. Although the stock could continue to see gains if it can maintain its profitability and promising sales trends, that's far from a sure thing -- and in any event, you're not likely to see a near 10-bagger in the stock for quite a while. Similarly, Beazer Homes (NYSE: BZH  ) managed to keep afloat despite its big debt load and has even reduced it a bit, but with interest rates potentially heading upward in the next year or two, the challenge of refinancing that debt will continue to plague the company going forward.

Smart moves for the next two years
Just because mainstream investors are starting to get back into the market doesn't mean that you have to head for the exits right away. But you do need to steer clear of the euphoria that has started to creep back into investor sentiment. It's true that economic recovery is showing a few signs of becoming more apparent, but to a large extent, the stock market's gains already reflect investor anticipation of that reality. To see more big gains from here, the market will need some unexpectedly good news.

Rather than jumping back whole-hog into the stock market at this late date, your better bet is to think forward to the next big trend. For instance, it may be too soon to get into bonds, as rates could still climb higher. But after the stock market's big rise, you might have too high a percentage of your portfolio in stocks. Rebalancing into iShares Aggregate Bond (NYSE: AGG  ) or Vanguard Total Bond Market (NYSE: BND  ) will put you in the best position to take advantage of what the future brings.

It's good that investors have put 2009 behind them, but you should still remember what you learned back then. Keep those experiences in mind, and they'll help you be a better investor for the rest of your life.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.

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Fool contributor Dan Caplinger can't believe it's been two years already. He doesn't own shares of the companies mentioned in this article. General Motors is a Motley Fool Inside Value selection. The Fool owns shares of Ford, which is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy, like every other fundamental thing, applies as time goes by.

Read/Post Comments (3) | Recommend This Article (4)

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 March 09, 2011, at 3:54 PM, keith60 wrote:

    I can remember when there were people in this community yelling "Ford is done", "all they make is trucks", etc. Yes they make trucks, good trucks, and they sell a lot of them. Well run plants, new models and no bail out money. One of my first buys was F at $1.90. Now, Options are the way to go.

  • Report this Comment On March 09, 2011, at 5:47 PM, baldheadeddork wrote:

    The growth of the last two years is only part of the story. Dan is right, it's very unlikely that the market will double again by 2013. But if you bought dividend stocks two years ago you've still got a massive advantage over the rest of the market, and this is one you can ride for years and possibly even decades.

    Remember that yield is the current dividend divided by your purchase price. Altria has a 5.9% yield for someone buying today, but I bought in 2009 when the share price was 17.61 and that gives me an 8.6% yield. My Boeing yield is 3.6%, a stout 50% improvement over the yield on the current share price, and Microsoft is paying just over 3%.

    The advantage of buying dividend stocks when they were low and holding will continue to grow over the years.

    But I don't think the door is closed yet. Case in point: Ford. This is a speculative play for a dividend but I think it's a pretty safe bet. They paid a dividend for almost four decades before the meltdown and automakers traditionally return a good percentage of profits to shareholders.

    A 25 cent quarterly dividend would be almost a 7% yield at the current prices, and the company could afford that right now. That, and the strong possibility of a 50% rise in the share price over the next two years, is why I bought more Ford when it fell into the 15's last month.

    But the real profit for my portfolio is going to be in the yield of the shares I bought in May 2009. I couldn't convince my wife to buy F when it was under $2, but a 25 cent dividend is still going to generate close to a 20% yield on our original investment.

  • Report this Comment On March 13, 2011, at 6:51 PM, CMFStan8331 wrote:

    I agree that obvious buying opportunities are getting scarce in the stock market, but I'm not convinced that long or intermediate bonds are a good investment at this point. Even if inflation remains well-controlled, rates are likely to drift upward for some time. And if we see a sequence of events that leads to another severe drop in the market, we know from experience that bonds will be pummeled as well. The chances that we could see a lengthy fall in interest rates from here without a major meltdown of the economy and the stock market seem very remote to me.

    For any investment funds not in stocks at the moment (or to be pulled out in the near future), I think cash or short-term bonds would be the better choice. We could see a significant pull-back at some point in 2011, but I believe that would represent a buying opportunity. I agree with baldheadeddork that for anyone looking to take a more defensive stance with funds not moved to cash, high-quality dividend stocks are a good choice for both the short and long-term..

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