The financial mess the world is experiencing can serve some purpose, for one, making you a better investor, with stocks and exchange traded funds (ETFs). While it is preferable not to have had to go through this in our lifetime, the fact that we are has some lessons to be gleaned.Jeffrey R. Kosnett for Kiplinger looks to investment counselor Larry Swedroe for some anecdotal lessons and valuable financial knowledge that can be taken from this financial mess.

1. Know where your money is- literally. Bernie Madoff, among others, put to rest the idea that you can get rich from unpublicized investment opportunities unavailable to mere mortals. Keep track of all buy-and-hold investments and know who the borrowers are when dealing with a package of mortgage or business loans.
2. Risk and chance are bigger than ever. A side effect of the financial meltdown is that every investment is riskier now than before. Blue chip stocks lost half their value, money markets mutual funds aren’t that strong and muni-bonds have fallen double digits.
3. Superstar fund managers are fading out. All of them are smart, hard-working professionals. But in almost every instance, money managers who stay around long enough eventually see their performance regress toward the average. With an ETF, you can pay the least in annual expenses and have total control of your investments.
4. Give credit where due. If a loyal advisor or analyst urged you to switch more into cash and Treasuries a year ago, then you should shower him or her with praise. It is near impossible to predict the market.
5. Cash rules. CDs and money market accounts are hard to get rich by, but they do allow a large cash reserve to be readily available to buy bargain-priced investments.
6. Say “No” to new investment gadgets. There’s a high chance that other gadgets, such as principal-protection notes and absolute-return funds, will also disappoint because any complex trading “model” is vulnerable to unusual events, such as the failure of big banks or a two-year recession.
7. The new normal. The general trend in stocks, commodities and real estate has been down, but not straight down.Consider the time of day that you trade to maximize on profit. Before midday, the contrarians and bargain-hunters will poach, narrowing that 10% loss to a more palatable 4% or so. If you need to sell, that’s the time do it.
8. It’s a small world we live in. Nowadays, companies are operating in more places, other countries, regions and financial markets, taking the world to new depths of correlation. Instead of diversification by country, spread out across categories – stocks, bonds, real estate and commodities – with both domestic and international selections.

Tags: ETF 101