There are always rebounds from bear stock markets. The question we face in 2010 is how much of the 60%+ rebound from March of 2009 is "rented" vs "owned." By rented, the best example I can provide is the 2000-2002 technology bubble burst. The NASDAQ reached a February 2000 high of 4,696. It subsequently crashed to 1,172 in September of 2002. These returns were rented, ending up as "fairies on paper" that disappeared. The NASDAQ stands at 2,269 as of 12/31/09.
So, as we look forward to 2010, should the record returns of 2009 be viewed as "real" or "rented?" I started taking the stance halfway through 2009 that we were moving into the "rent but not own" category of stock market reality. For this reason, we have been reducing our risk exposure in the portfolios I manage at Wade Financial Group over the course of the past six months. I believe it is more important for investors to end up owning real portfolio returns. This may mean that their returns "may not be keeping up" during the rental stage of a stock market rally which may be judged, as based upon economic reality, when viewed several years later.
In our indivdual stock portfolios, we recently purchased more defensive stocks that we believe are well positioned for a potential negative return for the U.S. stock market in 2010.
Understanding the difference between "renting" vs. "owning" investment returns is critical for investment success.
Only by standing against the prevailing winds – selectively, but resolutely – can an investor prosper over time. Such a strategy may underperform during the portion of market cycles where stocks are rising based upon the momentum of the herd vs. fundamental valuations.