6 Investment Rules That No Longer Apply

Investment Rules

Some long-honored investing doctrines are being questioned, in light of the recent housing and stark-market meltdowns. In addition to Florida swampland and Brooklyn Bridge deals, some evergreen investments now require increasing investigation.

We've compiled a list of investment standards now ripe for review.

1. There's no place like home: Historically, real estate has turned only about 0.5% a year, after inflation. During the housing boom of 1977 to 2004, prices for residential real estate only increased about 7% annually, after adjusting for inflation. The last two years have stripped most homes of any profit margins, while still requiring extensive investments for closing costs, upkeep and taxes. Home ownership does provide tax benefits, but these no longer are enough to offset the costs.

2. Stocks always go up over the long term: That all depends on how you define "long term." Of late, other assets have outperformed stocks over longer time-frames than in the past. For example, socking your money away in bank CDs over the last 10 years would have earned you more than an investment in an index fund. Treasury bonds also have beaten stocks over the last 25 years.

3. Leave the investing to professionals: Many investors paid high fees to mutual funds, brokers or advisers and still got wiped out by the crash. Historical returns have shown many investment managers don't consistently beat the market averages. You can't control the market's directions, but you can focus on fees and expenses. Index-tracking mutual funds and exchange-traded funds give you broad market exposure at very low cost. Foregoing professional trackers means you'll have to spend more time following your investments, but you can avoid paying "professionals" who don't perform.

4. Diversification hedges against market drops: The theory is that different asset classes don't move in tandem; so if you own a broad range of assets (i.e. small- and large-cap domestic stocks, foreign shares, bonds and commodities, real-estate investment trusts), some will zig while others zag. In fact, nearly all asset classes fell together during this recession, with the exception of U.S. Treasury securities.

5. Always be fully invested: Experts recommended staying highly invested in stocks. This theory was based on calculations showing if you missed the biggest 10 days in the market, you would be 50% poorer than someone who employed a buy-and-hold strategy over that period. But the biggest one-day moves, up or down generally happen when the market is declining overall, as in the past year or so. As a result, you would have missed not only the biggest up days but also the biggest down days if you bailed on this market.

6. Some stocks are recession-proof: Dividend stocks and other blue chips have often been viewed as safe havens for your money. Yet stocks known for paying fat dividends in the past have cut them. Companies that produce consumer staples and drugs have often been thought to be safe, based on the theory that people always need to eat, wash and take medicine. But in the recession, many of these so-called defensive stocks have done poorly. "Vice" investing, on cigarettes, liquor and gaming, has done just as poorly, losing 41% in 2008.