Now that it seems like the worst is behind us, 2010 should be a time for reflection and moving onward and upward. However, before we can make the next big move in our portfolios, investors should be sure to learn from past mistakes to avoid falling into the same old traps.
Justifiably so, many people are scared to get back into the market. As a result, an enormous amount of money flooded the bond market in 2009. Last year, nine of the top-10-selling U.S. mutual fund categories were bond funds, and at $120 billion in net cash inflows, intermediate bond funds harvested as much money as all ETFs and target-date funds combined. That is an astounding influx of new money into the bond market.
Long-established investment group Vanguard recently warned its investors not to expect the sizzling returns of 2009 to continue. To deter speculative money from invading its portfolios, Vanguard closed several funds and issued alerts on others. One was the Vanguard High-Yield Corporate Fund, which holds bonds from companies like Ford Motor
Another area of tremendous popularity has been emerging markets, as indices from countries like Brazil and China have far surpassed that of the United States. However, emerging markets are now trading at higher multiples than their developed country counterparts, and there's frequent chatter about a new bubble.
It's easy to be awed by international companies like Baidu.com
The robust growth in these two markets presents the question of whether the inflow of money is actually here to stay, or if it will be as quick to leave as it was to arrive.
Drawing the right conclusion
Now don't get me wrong -- I'm not saying that you shouldn't invest in bonds or emerging markets. Of course there are plenty of reasonable bond funds that offer safety of principal and have great track records. And there is definitely no denying the potential growth of emerging markets. But let's not forget what brought us to the brink of financial collapse in the first place: following the herd mentality that prices would continue to go up and up ... until finally, our collective bubble burst. The worst idea for 2010 is to chase the latest trends, however tempting and promising they may seem.
Going against the grain
Everyone is probably familiar with Warren Buffett's famous quote about being fearful when others are greedy and greedy when others are fearful. So what are people actually scared of these days?
Yup -- plain old, vanilla dividend stocks. In the last two years I've read more articles about dividends being slashed and how companies just don't have the cash to sustain their payouts. Last year was among the worst ever for payouts, according to Standard & Poor's, with 804 companies cutting their dividends. That's more than a seven-fold increase over 2007.
Yet the Motley Fool Income Investor analysts have a much different philosophy. They ignore the short-term noise and concentrate on historical truths. Like professor Jeremy Siegel's research that shows dividend-paying stocks have outperformed the overall index by three percentage points annually from 1957 to 2003.
And even more importantly, the Fuller and Goldstein study which says that dividends matter more in declining markets than in advancing markets. More specifically, dividend payers outperformed non-dividend payers by 1%-1.5% per month in declining markets! So if you're worried about continuing economic woes for the next few years, dividends are the place to park your cash. Not only will you receive the benefit of a fixed stream of income, but with stocks, you'll also have room for growth.
So in 2010 look for stocks with solid reputations, great yields, and reasonable payout ratios. It also doesn't hurt to find companies that have been increasing their dividends for quite some time -- that way you know they're consistent. For instance, 3M
If you're looking to avoid the stampede of investors rushing toward the latest fashion, then dividend investing may be the right strategy for you. In tough economic times, it pays to be prudent with your money and give yourself the best chance for financial success; dividend stocks have more than proven their worth.
The analysts who work at Income Investor offer one new stock every month, and they currently have seven stocks they think you should buy right now. If you need help getting started or just want a few good ideas, this might be the place to start. So far they're up over 7% against the S&P 500, and in this environment, that's nothing to sneeze at.
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Fool contributor Jordan DiPietro doesn't own any shares of the companies listed above. Baidu is a Motley Fool Rule Breakers recommendation. 3M is a Motley Fool Inside Value selection. Procter & Gamble is a Motley Fool Income Investor recommendation. The Fool owns shares of Procter & Gamble. The Fool's disclosure policy enjoys watching Washington, D.C., collectively freak out before a snowstorm.