Don't Repeat the Mistake of 2009

 | Jan 06, 2014 | 12:30 PM EST
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This week truly kicks off the market for 2014, as this is the first uninterrupted week of trading. While most are looking to rebalance their portfolios with the dozens of "Hot Stocks of 2014" that grace the covers of many financial publications, perhaps a more practical idea would be more useful.

This year is much like 2009. Rewind back five years to January of 2009: The S&P 500 had declined 37% the prior year. Bear Sterns was basically sold on the courthouse steps to JPMorgan Chase (JPM), Lehman Brothers collapsed, and shortly thereafter, storied names like Wachovia and Washington Mutual would be no more. January 2009, at the time, was the bleakest of market environments.

Jump to the present day. The market has just advanced the prior year by nearly 30%. A few months ago, Twitter (TWTR), surrounded by much hype but little financial substance, had one of the most successful initial public offerings of the year, now trading at nearly 3x its debut price. Stocks are booming. The deal spigot is flowing. Mom and Pop investors are rekindling an affection for equities. Today, you would be hard pressed to find a market bear anywhere. Even the most committed perma-bears are turning bullish.

Looking back, 2009 was the year to start piling up on securities -- despite all the negative sentiment. So, is 2014 the year to start reducing equity exposure?

Perhaps -- no thanks to the recipe of low interest rates and improved corporate earnings. But it would be prudent to incorporate a little contrarian thinking now. This is time to be picky in your stock selections. I have zero forecasting skills, so 2014 could be another 2013 -- the year of the dart-throwing investor.

But what we can forecast is that at some point, the pot will simmer. Markets are forward-looking creatures by nature. Last year's historic advance in the Dow Jones Industrial Average and S&P 500 foreshadowed precisely what analysts are forecasting in 2014: record corporate earnings and lower interest rates. Most of 2014 is already priced into 2013 stock market performance. Furthermore, the pain of 2008, while a distant memory for some, still resonates with many. Many equity portfolios have made back losses, and then some, from the Great Recession. This could be the year those gains are harvested.

A prudent investor should challenge popular sentiment. Note that I said "challenge," not "dispute." Continued low interest rates remain the biggest catalyst fueling equities today, but they are creeping higher. If corporate earnings fail to please the popular consensus, markets could be in for a ride. For 2014, consider injecting a healthy dose of intellectual skepticism into your thinking process and be very selective. Such an approach should stand tall this year.

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