My Eight Timeless Lessons

Always ask yourself, "What am I asking the client to invest in and how does the vehicle work?" If you don't know, then you need to find out. Then ask yourself, "What is the worst possible outcome that could occur by holding this instrument?" Make sure you can live with the answer before asking the client to invest.

? Lesson 5: Don't sell good assets at bad prices. History has shown time and again that market corrections are followed by a period of investor panic, usually occurring precisely at the market bottom. Investors tell themselves that by moving to cash or radically scaling back the risk in their portfolios, they are protecting their assets.

In reality, they are often inflicting long-term damage on their portfolios by selling holdings at bad prices and not successfully timing their re-entry to the market, thereby locking in big losses. To put last year's widespread sell-off into perspective, consider that many investors saw the value of their homes drop by as much as the values of their 401(k)s during 2007-2009. Did any of these individuals sell their homes and move to a tent until the housing market recovered?

It is practically impossible to predict when a recovery will occur and these periods are only identified in retrospect. By staying invested consistently in the markets, clients will be positioned to take advantage of the inevitable market recoveries, which are often clustered into short periods of time. The long-term gains they could realize from being invested during the recovery period can lead to portfolio value in the long term.

? Lesson 6: Balance optimism with skepticism. Your investment outlook should be between Cassandra and Pollyanna. Have confidence that capitalism still works and that the hierarchy of returns– equities over bonds, bonds over cash–still holds true in the long run. Don't rely on credit ratings alone and do your due diligence before recommending an investment to the client.

Listen to your inner skeptic and be concerned that U.S. debt ratings are not immune to a potential downgrade. Balance this perspective with your inner optimist by never giving up on or betting against America. The U.S. has proven to be more economically resilient that any other modern economy.

Lesson 7: Be humble. With the arrival of each new tide on Wall Street, investors try to find patterns where there aren't any. And they are quick to proclaim skill when it is perhaps nothing more than luck. More has been lost in the markets through arrogance than by all of the bear markets and Madoff combined. While alternative investing strategies may have short-term success, there is no long-term, fail-safe method to consistently delivering super-sized returns.

In 2008, many investors thought they had the answers. Some wanted to move to the sidelines and went to cash. However, staying in cash over the long-term will not build wealth. Some wanted to hedge. Hedging doesn't always work because it has some elements of market-timing: You need to know when to put the hedge on and when to unwind it, and no one can accurately predict what the markets are going to do.

Still others wanted to sell short. When the U.S. and other markets issued bans on short selling, short-sellers were left without an investment strategy. Each of these investors thought they could out-smart the market and most of them got it wrong.

? Lesson 8: Don't tell yourself, "It's different this time." It never is. History may not repeat itself, but it can serve as a useful template. Many pundits, respected academics, strategists and financial advisors have gone to great lengths this year to show that the markets are different this time around. But the core market fundamentals remain in place. The tenets of capitalism still apply.

Take note of history and avoid the market forecasting game no matter how sound you believe your process to be. The market is not always efficient in digesting information and fully reflecting it in the prices of securities. Why else would the Dow be valued above 14,000 in October 2007 and be at 10,000 by October 2009? Hence, having a long-term investment strategy, executed with a repeatable process, is essential to taking the emotion, and your own ego, out of investment actions.

Those are my eight timeless lessons. Give some thought to what yours might be. Then sit down with your clients and talk about the best ways not only to avoid making mistakes, but also of repeating history.

Emmett Wright, CFA, is the chief investment officer of the Northwestern Mutual Wealth Management Co., Milwaukee, Wis. He can be reached at [email protected]