The Key to Investing in 2009: Embrace Your Inner Gumby

I don’t know about you, but after spending nearly every waking moment during the past week focused on things such as the all-important announcement-that-was-no-announcement and the back-and-forth political games related to the so-called stimulus plan in Washington D.C., I could use a break from the politicos for a day or two. So, given that stocks are stuck in a range until we see some improvement in the economy; in this weekend’s missive, we thought we’d focus on a couple of strategies for investing that may lead to success in this difficult market.

In looking at the current market, let’s just be honest; this has been a brutal time to be a stock market investor. In fact, we saw a stat recently from Morningstar that if your mutual fund fell less than -27% last year, the manager ranked in the top 5%! And then, if you follow the fund industry’s mantra of “invest for the long term” (which is marketing-speak for “we’d like you to put your money with us and never ever touch it”), you will probably agree that the last 10 years have also been a little tough to take.

For example, the buy-and-hold crowd would probably prefer that you not look at the 10-year annualized returns of stock funds ending 12/31/2008. According to Barron’s (which uses data from Lipper), the average Large Cap Growth Fund sported a 10-year annualized return of -2.92% per year on 12/31/08. In English, this means that if you started with $10,000 on 12/31/1998 in an investment that then averaged a return of -2.92% each year, you would have been looking at an account value of $7,350 this New Year’s eve.

However, our records show that the Lipper Large Cap Growth Fund Index has actually done worse than that as the cumulative return for the most recent 10-year period is -34.27% (meaning that our hypothetical investment of $10,000 on 12/31/98 would now be worth just $6,573). And for those index-lovers out there, it may pain you to learn that the S&P 500 Index (price only) has fallen by a stunning -21.85% for the 10-years ending 12/31/2008.

Perhaps Fast Money’s Jeff Macke said it best in describing the current market environment. Near the end of the year, the ever-gruff Mr. Macke opined, “2008 will go down as the year buy-and-hold came to die.”

The point to rehashing these disturbing details, you ask? In short, this is no time to keep employing a set-it-and-forget-it approach to investing. We are of the opinion that you simply must cease and desist with the buy-and-hope mentality and instead take the reins of your investments. We believe you will need to ACTIVELY MANAGE your investment portfolios going forward. You see, the days of the secular bull market, where stocks went down only once every five to ten years – and then only for a few months – are gone.

But – and this is an enormously large and very loud BUT – please don’t despair, history shows us that you CAN make money during these long grueling secular bear market periods in stocks… if you are willing to do a little work.

Lesson One: Learn To “Lose Less” During the “Big Ones”

We believe that the first key to successful investing lies in the ability to play some defense in your portfolio. Remember, contrary to the mutual fund industry battle-cry, you don’t have to be invested in the stock market all the time. In short, why not take a little off the table when things get dicey?

We will admit that this is a very unpopular strategy during rip-roaring bull markets such as the one we saw in 1999. But then again, by the end of 2002, the idea of knowing how to play defense made some sense.

Please understand that we are not suggesting that you need to become a hyperactive trader of your mutual fund, ETF, or stock accounts. No, that strategy is also fraught with risk – but that’s a story for another day. We are simply saying that there are times to be fully invested (and maybe even leveraged to the long side) and then there are times where risk management is the key to success in the long run.

The following is an exceptionally elementary concept – but it is important to keep in mind. Last year, the Lipper Large Cap Growth Fund Index fell -40.7%. This means that in order to recover from the drubbing of 2008, the index will need a gain of +68.6%. However, if you could have taken a little off in an attempt to limit the damage last year – let’s say you managed to lose -20% instead of -40% – now you’re looking at needing a gain of only +25% to recover. And when you consider that, according to Ned Davis Research, the average bull since 1900 has gained +81.3%, the reasons to try and “lose less” during brutal markets become obvious.

So, assuming you have a job that does not entail watching the stock market all day long, just how does one actually implement such a plan? Believe it or not, something as simple as staying in tune with longer-term moving averages will do the trick. You do need to recognize that there are times NOT to follow every wiggle and jiggle of the line (we’re talking about sideways markets or times when the indices are trending up or down). However, such a strategy would have helped you “take something off the table” during the big bears of 2000-2002 and the massacre of 2008.

Granted, there are much better ways to play this game such as legitimate newsletters and money management firms. However, bringing these up in this forum might be more than a little self-serving.

Next: Be Like Gumby

Okay, we’ll admit that comparing the important business of managing investments to a child’s play-toy could be considered more than a little silly. But hopefully, our point is made: In order to succeed in this type of environment, you need to embrace a flexible approach to investing.

Please keep in mind that there is no rule anywhere which states that you MUST own stocks at all times! While we have been looking for a fairly substantial rally to begin in the U.S. stock market any time now, we most certainly don’t expect said rally to mark the beginning of a new bull market. No, we are simply looking for the typical bear market rally to take place once all the fear about the future subsides.

But I digress. The point here is that there is no need to feel like you must always be invested in the S&P 500 or the NASDAQ. Stock pickers know that you can beat a bear market by owning “the right stuff.” However, this is a