Smart Money Moves Are Easier in Hindsight

By Katherine Reynolds Lewis
c.2008 Newhouse News Service

Ready to scream if you hear one more can't-lose stock tip or secret for making a fortune in real estate? Who can truly say whether popular investment advice will leave you richer or poorer a year from now?

Hindsight is an easier game, and it can sometimes inform your future decisions. Let's look back over the past year at the financial moves that turned out to be brilliant.

1) Living within your means.

As a growing number of subprime mortgages turned sour, the availability of credit shrank and costs climbed for all kinds of loans. If you kept your debt low, you were in good shape. But anyone who needed to take out a new loan suffered.

"One of the dumb moves was taking all the credit you can get," said Will Prest, chief marketing officer of Transamerica Retirement Management in St. Paul, Minn. "If you bought a bigger house than you needed, you've gummed yourself up and limited your options."

Prest and his wife relocated to Minnesota this year, and deliberately bought a smaller house than they could have afforded.

2) Selling shares in finance companies. It was just a year ago, on June 8, 2007, that Bear Stearns stock hit a high of 153.50.

If you had sold short 10 shares that day, and bought them back on March 17, after JPMorgan Chase announced a deal to take over the troubled securities giant for $2 a share, you would have made $1,500.

In a short sale, you borrow stock and instantly sell it; then after the price drops you buy shares in order to return them to the lender. You get to keep the difference between the high sale price and the low purchase price.

Indeed, as damage from the mortgage crisis rippled across the financial sector, shorting stock in most financial services firms would have turned out well. As of Friday's close, Citigroup shares were down 62 percent, Bank of America's 39 percent, and JPMorgan's 20 percent, compared with a year earlier.

You also could simply have sold long-term holdings at the high price point. Of course, that point is known only in hindsight.

"It would've been good to recognize that the financials were way over-leveraged," said Jared Bernstein, author of "Crunch: Why Do I Feel So Squeezed?"

But even the experts have trouble timing the market.

3) Keeping some money in cash.

You should always have funds on hand to take advantage of buying opportunities, says Gene Marcial, author of "The 7 Commandments of Stock Investing."

For instance, last August the entire stock market tumbled because investors freaked out over the mortgage crisis and instability in the financial sector. But not all companies would truly be affected many recovered from that panic-inspired drop.

If you had sunk $1,000 into Apple shares, which traded as low as 117 in mid-August, you could sell the stock today for a profit of more than $500. Not bad for an investment of less than a year.

"You should really be prepared for all eventualities," Marcial said. "Just wait, and when things collapse and markets are run down, you know what to do."

Ask your financial adviser how much reserve is appropriate for your circumstances.

4) Selling dollars, buying gold.

The mortgage crisis burdened the entire U.S. economy, shaking investors' confidence in the nation. Moreover, with the Federal Reserve slashing interest rates, U.S.-based investments were no longer as valuable.

Both factors contributed to a drop in the price of the dollar over the past 12 months. As of Monday, the dollar had fallen 15 percent against the Euro and 13 percent against the Japanese yen.

Selling dollars and buying Asian or European currencies would have been smart, said Frank Jaffe, a certified financial planner in Roseland, N.J.

And since gold prices are based in dollars, the slumping dollar has helped investments in gold rise more than 30 percent from a year ago.

"If gold goes up in dollars, does that mean gold went up or dollars went down?" Jaffe asked.

The answer doesn't matter to the person who profited buying gold.

5) Investing in commodities.

"If you were in the market in energy stocks you'd have made a killing," said John Pridnia, a certified public accountant in Muskegon, Mich.

As investors fled the stock and housing markets, many sank their money into commodities and related companies. That helped push up the price of those goods and the associated stock.

For instance, Chevron Corp. shares are 23 percent higher than a year ago.

And you could have doubled your money investing in crude oil, which is trading over $130 a barrel, twice the levels of last June.

Food costs have climbed, as U.S. requirements to include ethanol in gasoline pushed up prices for corn. The growing wealth of developing nations such as China and India also has increased the demand for grains both as food and as fodder for animals that will be slaughtered for meat.

"This new consumer wants to eat better, is not growing his or her own food, and wants more protein," said Quincy Krosby, chief investment strategist for the Hartford, an insurance and financial services company.

As for prognostications, we're going to disappoint you. Without a crystal ball, it's hard to know what the best investing moves will be for the next 12 months.

Krosby contends that the period we're in with little clarity in politics, the markets, or the economy is an opportunity to buy low. If you're regularly contributing to a 401(k) fund or other savings vehicle, you probably are getting a great deal on undervalued shares.

Regardless, you can be sure that tips No. 1 and No. 3 will apply. They may even work hand-in-hand: If you avoid getting overextended, you'll have the capital you need to jump on opportunity as it presents itself.

This article was originally published by Newhouse News Service on Monday, June 9, 2008.