What is a successful year of investing without some regrets? After all, even the top performers could have owned a little more of something good or a little less of something that didn't work out so well. Considering that 2010 was a good year for the stock markets, but a lumpy one as well, there is no shortage of "woulda, coulda, shoulda" for this year. It is not all about self-torture, though. Sometimes an investor can learn valuable lessons by looking back at what they should have owned and should have avoided. (For related reading, also check out Finding The Right Stocks And Sectors.)
IN PICTURES: 8 Signs Of A Doomed Stock
Should Have Owned: Materials
With the global economy rebounding out of the depths of the recession, commodity prices snapped back strongly this year. A wide range of industrial metals saw double-digit price increases in 2010, with iron, copper, aluminum, nickel and tin all substantially higher than a year ago. Not surprisingly, then, miners like Freeport McMoRan (NYSE:FCX) and Vale (Nasdaq:VALE) did quite well. In fact, "industrial materials" was the best-performing sector of the year and number two and three were not actually that close.
Should Have Avoided: Healthcare
2010 saw the multi-year malaise in healthcare continue. Angst and anger over the federal government's healthcare reform efforts cast a pall over the sector early in the year, but there was plenty of reality to back up the bad mood. As workers have lost jobs they have lost health insurance. Likewise, workers who still have jobs are feeling less comfortable about taking time off or opening their wallets for co-payments and deductibles. As a result, patient visits to doctors are down, as are procedure counts. Making matters worse, hospitals are still struggling to recover from the credit crunch, the recession and the losses in their capital funds - meaning there is less money to go around for capital equipment.
All in all, while there were winners like Illumina (Nasdaq:ILMN), Edwards Lifesciences (NYSE:EW) and Novo Nordisk (NYSE:NVO) that did well indeed, but malaise was the order of the day across drugs, devices and diagnostics.
Should Have Owned: Tech
Tech is admittedly a huge sector, but investors could have found dozens of winners in this space. Data storage, cloud computing and networking were all hot sectors this year, fueled in part by M&A but also by a strong rebound in corporate IT spending. Even large names like Oracle (Nasdaq:ORCL), EMC (NYSE:EMC) and Juniper (Nasdaq:JNPR) had enough investor support to more than double the returns of the broader market. Although tech is not generally thought of as an early cycle play, there was a big recovery trade in software and semiconductors as companies finally felt comfortable making more than just minimal maintenance expenditures. (For more on tech, see 4 Industry-Changing Tech Trends.)
Should Have Avoided: Banks
Banks did well in 2009 as investors abandoned the companies that seemed doomed and rushed to the relative safety of the companies that seemed more certain to survive. 2010 was a different year, though, and investors were much more concerned about credit developments and lending activity. While the "financial services" sector did well then, it was largely a function of recoveries in spaces like real estate, insurance and non-U.S. banking. Though a few banks did manage to beat the market (like Wells Fargo (NYSE:WFC) and US Bancorp (NYSE:USB)), many more were stuck in a market-trailing malaise as investors fretted that regulation, sluggish economic activity and under-recognized credit losses will all limit the recovery prospects of the sector.
IN PICTURES: 7 Ways To Position Yourself For Recovery
Should Have Owned: Gold and Silver
There are plenty of investors who almost never consider gold or silver as suitable assets for their portfolios - they don't produce any cash flow, they don't have inherent value, and so on. That said, there is a simple and compelling counter-argument - the object of investing is to earn the highest risk-adjusted returns possible, and it is foolish to turn up one's nose at any investment that can help achieve that goal.
In any case, 2010 was another year of strength for gold and a year of an exceptionally strong rebound in silver. The arguments in favor of gold (and precious metals in general) are familiar but still current - high government deficits, significant expectations of future inflation, worries about national solvency and policies that are tantamount to currency debasement. The SPDR Gold Shares (NYSE:GLD) became the fifth-largest gold-owner in the world, while investors also piled into iShares Silver Trust (NYSE:SLV) and other silver assets to play its relative undervaluation to gold for much of the year.
Another Year, Another Chance To Do Better
This is the time of the year when analysts and commentators guess which sectors will outperform in the coming year, and it is probably true that investors can find a bull case on any sector or industry if they look hard enough. Instead of making bets and sticking with them no matter what, investors may want to stay well-diversified but nimble instead - looking out for those companies and industries that seem to doing better than expected and where investor interest seems to be getting more favorable.
The Bottom Line
The great news for investors lamenting their mistakes in 2010 is that the market always gives multiple second chances. Every year there are sectors that outperform and every year there are stocks that double or triple in value. That is reason enough to keep hunting for great stocks. (For related reading, check out Crash-Proof Sectors You Should Be Watching Now.)
For the latest financial news, see Water Cooler Finance: Canadian Takeover And U.S. Tax Breaks.