10 lessons from the great stock crash and recovery

U.S. stocks lost more than 55% of their value when they bottomed out on March 9, 2009.  On Monday, they set yet another all-time high. A balanced portfolio weathered the storm quite nicely.

So why is it that most investors are still way behind? The answer is simple: Expenses and emotions.

Unfortunately, most investors aren't all that great at learning from their mistakes, so they tend to repeat them.

Here are 10 lessons we can take from the great plunge and recovery to use the next time markets try to pick our pockets.

1. Neither good times nor bad last forever

In 2007, the economy was booming and the experts were forecasting more good times ahead. U.S. stocks had doubled and international stocks tripled in the previous five years.

We all came to know that would not be the case, as stocks plummeted only a year and a half later. The experts' forecasts were then bleak, and firm in their belief that we were sailing into the Great Depression ahead.

In reality, stocks and the economy have ups and downs and it's foolish to think good times will always get better and bad times will always get worse.

2. Markets love bad news (and hate good news)

In March 2009, the news was grim. Financial powerhouses either sunk, or were thrown a life preserver in the form of huge government cash infusions. GM was on the brink of bankruptcy (which it finally entered) and unemployment was going through the roof. It took guts to invest back then, yet it turns out that buying stocks during a recession is a heck of a lot better than buying in a boom.

The market has already acted based on expectation. Despite the news getting worse after March 2009, stocks surged ahead.

A good rule of thumb is that the more positive the economic news is, the more likely it is that it's a sign the market may be overvalued. Conversely, the worse the economic news, the better the sign that markets will recover.

3. Do the opposite of the gurus

Do you remember the much-repeated saying that pretty much defined the bomb shelter investing philosophy of early 2009? The answer is "cash is king," and it was trumpeted throughout all of the investment kingdom. Ironically, it turned out that every singe asset class did well except cash. Stocks, bonds, commodities, and precious metals soared. Cash that sat on the sidelines missed out.

Remember that the gurus nearly always predict what recently performed well. But reversion to the mean is alive and well and yesterday's winners are more likely to be tomorrow's losers. Buy what the gurus tell you to sell and sell what they tell you to buy.

4. Next time will be different too

The financial system nearly collapsed. That has never happened before. Out came the cries of the new paradigm and the new rules of money.

Of course it was different, just like the internet bubble collapse was different, and even the near bear market last year was different, which brought cries that never before were so many sovereign nations in danger of default.

Embracing new paradigms and new rules of money will rob you faster than if you decided to throw your money out the car window on the freeway. If you are lucky, you will live through several raging bull markets as well as bears. Every one will be caused by something different. Every one will pull you into being greedy or fearful.

5. Never trust the media

The media distorts in several ways. Not only do news stories -- especially minute-to-minute coverage on financial TV -- magnify greed in good times and fear in bad, they also distort market performance.

You may not have known the U.S. stock market is currently at an all time high. After all, the DOW and the S&P are still well below their 2007 peaks. That's because they don't include the return from dividends.

Yet, if you had invested $1,000 at the market high on Oct. 9, 2007, in the Vanguard Total Stock Index fund, you'd have more money today.

6. Funds will always flow in the wrong direction

I can't predict the stock market but I can predict investor behavior with near perfect accuracy.  When stocks are high, investors will pour money into stocks. After they plummet, investors decide cash is king.

This happens with individual investors and professional advisors alike, as I noted in the TD Ameritrade datareleased.

The answer, of course, is simple rebalancing to get back to your target allocations. This means you'll be buying when the herd is selling and selling when the herd is buying.

7. Investors have short memories

The market plunge of 2008 and early 2009 is but a distant memory. Sure, we had some unpleasant flashbacks during those five consecutive months of declinesthrough September of last year, but they too are now a distant memory.

The truth is that it's hard to remember just how much pain we were in back then watching our future independence evaporate before our eyes. That sort of pain causes us to do destructive things, like selling stocks when we should have been buying.

We tell ourselves that we will behave differently next time and then we don't.  The older we get, the more money means to us.  The more money means, the more emotionally we will react.

8. Expenses matter in any market

"Sure indexing works in up markets because a rising tide floats all boats. In a volatile market, however, you want an active manager who knows when to move in and out."

If I had a dime for every time I've heard this, I'd be rich. Not only is it illogical, there is no data to support it. Looking at the last incredibly volatile five and ten years, how did the Vanguard Total Stock Market Index fund do vs. it's peers? According to Morningstar, it performed in the top 25 percentile over the past five years and top one percentile over ten.

Whether markets are up or down, arithmetic still works. Market return minus fees equals investor return. Duh!

9. Never think you are smarter than the market

When I graduated college in 1979, I thought I knew everything. Buying gold in the last gold boom taught me my most valuable lesson - to never think I'm smarter than the market.

I still have hunches and instincts that are very hard to resist. But I work very hard to resist them and nearly always succeed. Knowing that I'm not smarter than the market is my key advantage as an investor and as an advisor.

When investors think they know more than the market, the market is likely to swat them like a bug for their arrogance. It's a very lonely feeling to avoid the addiction to prediction, but it's very profitable.

10. Investing is simple but not easy

Every single one of these lessons is just basic common sense. Investing really couldn't be any simpler. This simplicity is illustrated by my son who, at age eight, built the second grader portfolio of three broad index funds. A total U.S., total international, and a total bond fund maximized diversification. Because money didn't mean anything to him, it was simple to minimize emotions and buy stocks when they were on sale.

It really is that simple for adults too, just not very easy. Money means too much to us and that causes us to violate all of the lessons over and over again.