Tis the season for 2011 forecasts, fa  lalala  la  lala  la  la.

It’s that time of year again where everyone on Wall Street is publishing their 2011 market outlooks.  Where you believe the market is heading next year depends a lot on where you think we are in the economic recovery. 

You may look at the unemployment rate along with housing starts and sales, and decide that we’re still in a recession.  Someone else may look at profit margins and the Institute for Supply Management Index and determine that the recovery is in the mid-cycle.  Then there is Fed Chairman Ben Bernanke on 60 Minutes telling everyone that we are at least three years from moving into the early cycle. 

If you follow the financial media at all in the next several weeks, you will hear a wide range of opinions about 2011.  Rather than gazing into a crystal ball, perhaps it is more important to focus on things you can control, and let your investment advisor worry about projecting the future.  Here are some things to keep in mind heading into 2011.

Live beneath your means.  You can’t grow your wealth if you spend more than you earn.  This is probably the most important principle for successful investing, but many people find it difficult to adhere to.  The easiest way to live beneath your means is to “tax” yourself every month before spending on discretionary items. 

Stay liquid.  You should never invest with money that could be needed right away.  Money you may need in the next couple of years should be in a savings account or the equivalent.  If you have a big expense coming up (house, car, tuition, medical bill, etc.), don’t bet your money on a stock now, no matter what you think the company’s prospects are.  Investing is a long-term game; gambling is a short one.

Diversify. Nobody can predict the market’s movements, but spreading around your assets can help smooth out the ups and downs of your portfolio.  Investing in a mix of stocks, bonds, and cash investments (and diversifying the investments within each of these asset classes) is crucial to investing success.  Several studies support the idea that approximately 90% of the variation in a portfolio’s returns over time can be explained by its target asset allocation.

Control your emotions.  Investors are bombarded with stimuli that make it hard to focus on long-term goals in an unemotional way.  Prone to emotions like fear and greed, many investors often focus on the short term.  Those that can’t control their emotions often fall victim to performance-chasing.

Invest for the long run.  It’s very difficult to predict the ups and downs of the market often enough to make market-timing a consistently winning strategy.  Frequent buying and selling of investments can increase your taxes and trading costs enough to wipe out any gains.  Technical analysis doesn’t work either.  Look at the graph of your favorite investment using a time span of two years, a decade, and since inception.  See a pattern that doesn’t require you to keep an investment for ten to twenty years and doesn’t shrink to near-zero when accounting for inflation?  Me either. 

Know yourself.  Some people can shrug off big market swings, others cannot.  The other problem is that people aren’t honest with themselves about their own risk tolerance.  That is why it helps to talk to an investment advisor to determine your risk tolerance and make sure you are truly comfortable with the makeup of your portfolio.

Happy Holidays!

Peter Lazaroff, Investment Analyst

www.acrinv.com

(636) 449-4900