The worst performers after any crisis tend to be the best performers when markets and exchange traded funds (ETFs) recover, and 2009 was no exception. But investors still need to be aware of the potential economic potholes that could derail the progress made to this point.
Developed countries have incurred heavy budget deficits in combating the financial crisis, and the International Monetary Fund (IMF) said that the “developed country debt to GDP will be 114% by 2014 compared to just 35% for the developing countries,” reports Jeff Pantages for the Alaska Journal of Commerce.
Banking may also never be the same. The banking system will likely be required to hold a larger capital buffer. Deleveraging by consumers and businesses will continue, and as people spend less and save more, economic growth will slow down.
Economists believe that the United States will grow 2.5% in 2010 and 3% in 2011. Inflation is expected to be between 1.5% to 2% and unemployment will remain in the 9% to 10% range over the next couple of years. The IMF estimates that the emerging markets will post a 5% expansion compared to the 1.5% for developed countries next year.
For long-term investors, it is believed that equity returns will be around 8% and bond returns around 4%, says Pantages. Pantages also urges investors to use index funds because of their low expenses and broad diversification.
How can you cope in this new economy?
While we’re staunch advocates of eliminating emotional decision-making when investing and approaching decisions with a clear, rational head, the best move may be to have a strategy. Why?
- We’re seeing more booms and busts. If you’re buying and holding in these kinds of markets, you could be losing a lot of ground. The S&P 500 is still below where it was 10 years ago, which means that if you bought and held it, you’d be worse off than you were a decade ago. Buy and hold is a strategy may have worked before, but today’s markets require a different tack.
- A strategy will enable you to focus your energies on what’s important, whether it’s your hobbies, researching stocks or watching “Dancing with the Stars.” You’ll have “found” time that once was spent fretting over whether to buy, sell or hold. [New Year, New ETF Strategy.]
A simple strategy we suggest is trend following – watch the 200-day moving average to pick your spots and have your stop loss ready for action. You can learn all about how to follow trends in The ETF Trend Following Playbook.
For more information on trend following, visit our trend following category.
Max Chen contributed to this article.