Top 5 lessons learned from markets last year

I'd like to suggest we all learned a lot last year about markets and investing in general. Here are my five top lessons of 2009:

1. When faced with an economic collapse, don't underestimate the central banks' power to forestall Armageddon. Or, as the time-honored Wall Street line goes: "Don't fight the Fed."

As we've seen amid the credit-market meltdown of late 2008, the Federal Reserve's bag of tricks is nearly bottomless: short-term interest rates at zero, an alphabet soup of lending programs, more than $1.7 trillion of purchases of mortgage and Treasury bonds, etc.

The Fed's intervention was all the more powerful because it was coordinated with every other major central bank.

Mission accomplished? We know we avoided a new depression in 2009. We don't know if the fix is permanent — or whether the cost will be severe inflation down the road.

2. Keep the faith in the world's emerging markets.

For much of this decade, Americans have been advised to invest overseas because that's where economic growth was likely to be fastest in the long run, particularly in developing economies such as China, India and Brazil.

The story line still holds up. The average emerging-markets stock mutual fund is up 68 percent in 2009 after losing 55 percent in 2008.

It isn't just that emerging economies are growing faster; they also have accumulated vast wealth that gives them economic critical mass.

We are the debtor now; they are the creditors. Why would you not want a long-term stake in the creditors?

3. You can still trust basic portfolio diversification.

Making sure your portfolio has a broad mix of investments remains the best strategy for achieving growth without undue risk to your nest egg.

In fall 2008 nearly every type of asset was collapsing. By early last year the lock-step movement of assets was over.

Many emerging stock markets, for example, were holding up even as U.S. shares continued to plummet in January and February. The price of gold rose nearly 7 percent in those two months. Municipal bonds also were rallying.

Simply put, broad-based diversification raises the likelihood that you'll always have some assets doing well, at least partly offsetting those that aren't.

And if some chunk of your portfolio is holding up in tough times, you will be less inclined to sell your losers at the wrong point — i.e., at or near the bottom.

4. When the facts change, be prepared to change your mind.

That's paraphrasing John Maynard Keynes' famous quote. I'm applying it here to the economy.

Last spring, U.S. economic data began to suggest the recession was bottoming. Remember Bernanke's reference to "green shoots"? And in a world awash in cheap money from central banks, all it took to entice many investors back to severely depressed markets was the belief that things had stopped getting worse.

Human nature doesn't change: Investing is forever a battle between greed and fear. Last year, greed regained the upper hand.

5. Don't invest solely by looking in the rearview mirror.

After a year like 2008, it may be hard to not think about how much you've lost. But that can obscure opportunities. Stop counting your losses and focus on what your portfolio needs to meet your long-term goals. You'll feel better.