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
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
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
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.