Picture it: You're at a holiday party enjoying the nog, talking about Tiger Woods and airline security when you, as a stock analyst, get ambushed. "So I wanted to ask … is the recent rally over? And if it is, what should I do next?"
Begrudgingly, you offer your opinion because these are important questions for anyone looking to make money in 2010. And rather than keep my opinion to myself, I'm happy to have been challenged by our research team at Motley Fool Pro to bring my own nog-fueled thoughts to Fool.com.
So is the rally over?
I'm no short-term market timer, and if I were, I'd do much better running a leveraged hedge fund than passing out insights for free on the Internet.
That said, even I can admit that there's something incongruous about the stock market's recent returns. The S&P 500 is up some 60% since March even though U.S. unemployment hovers near 10% (a number that goes even higher when you add in the underemployed), government spending remains out of control, and policymakers have done everything they can in terms of stimulus and rate cuts to pump up the economy.
In other words, the consumer still seems depressed, inflation looms, and we're now working without a net should anything go economically awry in 2010. Mix those facts together and it does look like we're in for some type of "correction" at some point over the next 12 months.
Now, for the long-term investor, this is a very good thing. Another stock market decline would give investors with 10- to 20-year time horizons the opportunity to buy shares of superior companies at fire sale prices. Early in 2009, for example, you could have purchased Google (NASDAQ:GOOG) shares for less than $300 or Microsoft (NASDAQ:MSFT) for $15 -- prices these elite franchises hadn't seen in years and that we may never see again.
But not all of us are super-long-term investors. That, after all, is the catch-22 of investing. Since time is the most important variable when it comes to saving, it's the people closest to retirement -- those who need their savings in the near term -- who often have the most to invest.
Let's return to the original question
So is the rally over? The answer is "no" if you're a long-term investor. While the world has its problems, there is enough growth taking place globally and enough innovation happening in the technology and energy sectors that there are plenty of places to put money to work.
That said, if you're a U.S.-focused investor with a shorter time horizon, then 2010 has the makings of a rocky year. First and foremost that means the potential for volatility, and you need to ask yourself if you're equipped to handle that.
What should I do next?
With that as background, here are the three must-dos I doled out at holiday parties this season for anyone looking to play a little defense in 2010.
Must-do No. 1: Buy some bonds
Jack Bogle, the founder of Vanguard, says he's made a career out of repeating the same sound advice over and over for the past 50 years. And one of those pieces of advice is to make sure that the percentage of bonds you own in your portfolio is equal to your age. So if you're 60, you should have 60% of your investable assets stashed in bonds.
That may sound conservative, but rest assured that the ballast bonds provide is crucial for all investors, but especially for investors who are closer to retirement.
One caveat here is that, given our government's rampant deficit spending and the prospects for inflation, you likely don't want to own long-term Treasuries. Rather, consider a short-term bond index.
Must-do No. 2: Get some foreign exposure
We all know about the problems in the U.S. economy. But what you may not know is that emerging markets such as Brazil, China, and India not only handled the downturn better than we did, but also appear to be emerging from it faster and on steadier ground.
PIMCO co-chief investment officer Mohammed El-Erian has taken to calling this changing world order "the new normal," and he recommends that U.S. investors who have previously been dramatically underexposed to foreign markets now consider having up to 60% foreign exposure.
So take some time in 2010 to add global exposure to your portfolio. You can do that quite easily without having to learn the ins and outs of foreign stock analysis by purchasing multinationals that make significant sales abroad -- such as Coca-Cola (NYSE:KO) or Procter & Gamble (NYSE:PG) -- or an ETF such as Vanguard Emerging Markets (NYSE:VWO).
Must-do No. 3: Consider commodities
Finally, if inflation does hit us hard in 2010, you can protect the value of your savings by making sure that at least some of it is stashed in commodities, such as oil or gold, that are likely to be repriced upward with inflation.
You can do this easily by purchasing industry names such as ExxonMobil (NYSE:XOM) or Freeport McMoRan (NYSE:FCX) or by purchasing some of the new, low-cost ETFs that track the price of the underlying commodity without giving you the hassle of making room to store gold or oil in your basement in between the holiday decorations.
Get started
All told, 2010 has the potential to be a rocky year, but if you go out today and make sure to (1) buy some bonds, (2) get some foreign exposure, and (3) consider commodities, then you'll be positioned better for 2010 at the end of the day than you were at the beginning.
And if you're looking for additional defensive strategies, then consider signing up to receive information on our Motley Fool Pro model portfolio.
These, as I mentioned, were the guys who asked me to offer my thoughts on 2010 in the first place, and they're collecting intelligence from across The Motley Fool to help them decide how they'll allocate their money across stocks, commodities, ETFs, and options in 2010. Their goal is to make money in flat or even down markets, and they do it all in full view of anyone who signs up to become a Pro member.
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