It's hard to believe that another year is about to come to an end. But for all that 2010 may have seemed boring in comparison to 2008's market meltdown and 2009's amazing recovery, I think this year was actually more useful in reminding investors of some valuable knowledge about their finances and the markets.
Lesson 1: Stocks aren't dead.
2009's huge rebound gave investors a wake-up call. Far from collapsing into oblivion the way some bearish stock commentators predicted during the financial crisis, stocks surged more than 65% from the market's lows by the end of 2009.
Yet more than a few folks thought that was simply the mother of all dead-cat bounces, pointing to similar market behavior following the market crash of 1929. Using that timeline, bears expected an even greater drop from these levels.
What those predictions failed to take into account, however, was just how cheap stocks were even after massive run-ups. Even now, with the market up more than 10% this year, you can find plenty of megacap names from several different industries trading at less than 13 times this year's earnings, thanks to unique challenges. For instance, software giant Microsoft has struggled to follow up on its legacy Office software success. Medicine-cabinet king Johnson & Johnson (NYSE: JNJ) has had to deal with dozens of product recalls. And oil baron ExxonMobil (NYSE: XOM) is trying to integrate its XTO Energy acquisition. But their low prices give investors some upside if they meet those challenges successfully.
Lesson 2: Highfliers can keep flying.
Momentum investing may seem like voodoo to some people, basing future stock movements almost entirely on where they've moved in the past. But sometimes stocks keep going up even after big jumps for perfectly good reasons; if you sell out fearing what you might think will be an inevitable reversal, then you'll miss out on even bigger gains.
There are countless examples of this phenomenon, but two of the best are Netflix (Nasdaq: NFLX) and Sirius XM Radio (Nasdaq: SIRI). Sirius quintupled during 2009, but still managed to more than double this year, thanks to continuing subscription growth and some programming coups, including the important renewal of Howard Stern's contract for another five years. For Netflix, the move from a pure mail-DVD model to incorporate streaming has raised some concerns, but so far, it's paying off beautifully for the content delivery service.
Lesson 3: Market timing doesn't work.
This was a bad year for market timing rules. When the S&P 500 fell during January, many thought it foreshadowed a down year for the market. But stocks jumped more than 10% after the end of January to rise to new post-meltdown highs.
Then, after an up-and-down few months for the market, many pointed to September's historical status as the market's worst month as evidence that stocks would set new lows for the year. Yet instead, stocks rallied sharply, catching many by surprise and bringing the S&P 500 to its current level, which remains its highest since September 2008.
Using rules of thumb sometimes works, but the times that those rules don't work can really cost you. This year's experience is just another example of when market timing can go horribly wrong.
Lesson 4: The government is in the market to stay.
There's been a huge shift in the role of the government since the financial crisis. It's true that the government has been divesting itself of its financial interests in private companies. The completion of share sales in Citigroup (NYSE: C) is coming soon, and the initial public offering of General Motors (NYSE: GM) shares drastically reduced the government's holdings. Plans for an exit strategy from the government's huge stake in AIG (NYSE: AIG) have also been received well by shareholders.
But even if direct government ownership is fading, the government's influence is still clear. Congress held the markets hostage until passing the tax bill just days ago. Regulation in areas from banks and credit cards to health care will continue to move individual stocks dramatically. Government involvement in private industry may have been on the decline in the past few decades, but at least for now, it's back with a vengeance.
Keep on learning
The end of the year is a great time to reflect on the particular lessons you've learned, too. Each of us has had different experiences, yet we can all discover what we did well and what we did badly. By looking back, you'll put yourself in a better position to profit in 2011 and beyond.
Get some tips on protecting your retirement savings in 2011 and beyond. Click here to read the Fool's new special report, The 7 Secrets to Salvage Your Retirement Today.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.
