For stocks, 2009 was the best of times and the worst of times. It was the end of an Age of Foolishness, but unlikely the dawn of an Age of Wisdom. 

Rarely will you see such gut-wrenching losses and widespread doom and gloom followed by an outcry of rapidly rising optimism. The stock market recovery of 2003 was not nearly as robust, despite a much stronger underlying economy and a growing housing bubble.

The  actual changes in the economy (slow, steady increases in unemployment and housing troubles followed by slight improvements) appear glacial in comparison. But then, stocks have a tendency to bring out investors' manic-depressive side, which often results in overreaction both to down and upswings.

Perhaps that’s because so many investment funds use leverage, which magnifies losses and gains. Perhaps it’s because some investors watch that manic TV market prognosticator, the one who famously went on a network morning TV show just over a year ago to scare the bejesus out of everyone with his "sell everything!" rant. Although this message arrived just a few months after his incorrect "the bottom is in" message, it appears many still panicked, at least if you consider CD sales and stock fund redemptions during that time.

The market has recouped a sizable chunk of its losses from the crash with a 26.5% total return in the S&P 500 in 2009 – and that includes January and February’s perilous slide. However, the market would still have to climb about 40% to hit its highs of 2007 (heck, it would need to climb about 40% to hit its highs from March 2000,) which is why the 2000's were the worst decade to hold U.S. stocks. Too bad most thought stocks would always win over a period of ten years would be back in 2000 (in fact where told so by many experts). By comparison, the Powerfund Portfolios are all at or very near their all-time highs.

Although we don’t have the final numbers yet, it appears to have been a pretty good year for our model portfolios as well, partially due to a well-timed risk increase at the end of February. The graph below, borrowed from the Wall Street Journal, indicates the point at which we increased our allocation to higher-risk funds, along with the juncture at which we grew weak in the knees and cut the risk back a bit. In hindsight, we missed a good chunk of 2009's later returns by scaling back following the initial rebound. Let’s just say we made the easy money, although it felt scary at the time. We may miss a bit more as we prepare to take another "risk axe" to the portfolios and scale back the allocation to higher-risk bond funds and stocks. 

Such trading – although far from frequent – is still critical to positive returns, since we primarily subscribe to "buy and hold" investing when stocks are cheap, as they have been throughout most of post-1933 financial history. If stocks are expensive, as they were in 1999 (and to a lesser extent, 2007,) investors will generally fare better with a larger allocation to CDs and bonds. 

Back to Where We Started

We launched the model portfolios on April 1, 2002. That year went on to become the worst of a three-year bear market that continued until early 2003. Since then, the S&P 500 has returned approximately 10%, including dividends, which is to say investors' only return has been dividends. The index today is still down a whisper below where it was when the model portfolios were born.

During this same period, our model portfolios are up roughly 50-120%. We achieved these results three ways: (1) by owning bonds as well as stocks, (2) focusing on out-of-favor fund categories, and (3) buying on the way down and selling on the way back up.

If you review our trading commentary, you’ll note we were buying more stocks on the way down in 2002, and owned real estate, utilities, and emerging market stocks and bonds, which were out-of-favor during that time. 

Last year’s crash in commodities and foreign markets did not scare investors away for long. The moment those markets improved, the bargains dried up, and the money began piling in anew. Although we witnessed a sharp tech rebound in 2003, it petered out, and the market remained flat for much of the decade as investors appeared to be done gambling on tech stocks. 

As an example, look no further than the tech boom’s hot ETF, QQQQ. Now named PowerShares QQQ Trust, this Nasdaq 100 tracking fund now has less than half the dough found in either iShares Emerging Markets (EEM), iShares MSCI EAFE (EFA), or SPDR Gold Shares (GLD).

In 2009, fund investors poured back in, mostly into bond and foreign funds. U.S. stocks were not on most investors' radar. Fund investors apparently got the memo that the entire last decade was a loser, and seem to expect the next decade to be like the last one, one in which the U.S. dollar will continue to slide, foreign markets will rise, and commodities will be the only bankable investment. Fat chance.