People, businesses and governments may not meet the same mistake twice, but the mistake family is prolific and global, so it is a good bet that they will all meet multiple cousins, nephews and other relations of past mistakes. In other words, no matter what number may be printed on the calendar, there is always a host of mistakes to choose from when analyzing a year in the markets. Here are some of the financial decisions that took place in 2010 that deserve a second look in hopes of avoiding them in 2011 and beyond. (For related reading, see 10 Reasons Real Estate Could Rebound In 2011.)
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Piling Blindly Into Gold
Some will argue that there is always room for precious metals in a well-diversified portfolio, but the questions of "how much" and "which ones" are too often ignored. Gold was a strong asset in 2010, up about 25%, but silver did almost three times better - so those who obsessed about gold and ignored other precious metals really lost out. Moreover, those who rushed to sell their jewelry through those "convenient" mail-in services or buy the gold bullion and coins advertised on TV very likely got taken for a ride in the process. Diversification is a good thing, but too many gold bugs are losing sight of one important detail: Throughout America's long history, betting against the long-term prospects of the country has been a losing bet.
Bad Decisions After A Job Loss
Job loss, and the financial stress that goes with it, is a terrible thing indeed. What can make a temporary situation into a permanent issue, though, is not dealing with the problems in the right way. Some people buy into the notion of "lifetime earnings" and the idea that shortfalls in the early years can be ignored because they will earn more down the line. In these times, then, some people borrow heavily with their credit cards and dip into retirement savings to maintain their standard of living. It is absolutely understandable to go into debt and to do what must be done to put food on the table and keep the heat on. But it is almost unfathomable to read about people looting their 401(k) (and taking the 10% IRS tax penalty) just to go on spending sprees or vacations to "lift their spirits".
Getting Too Complacent About Risk
As the market rebounded in 2010, investors seemed a little too eager to get back on the crazy train in some stocks. There is nothing wrong with a little speculation or risk-seeking now and then, but investors piled into many questionable ideas in the second half of the year. A host of tech stocks - particularly those in data storage and cloud computing - saw valuations rise to levels that almost no amount of performance could legitimize, while a host of speculative miners and resource companies saw their market cap inflate on little more than hope. Although the market as a whole does not appear to be overvalued, these little speculative runs are a reminder that the next boom-bust cycle is a question of "when" and not of "if". (For more information on the potential bubble, see Are New Chinese Stocks Forming A Bubble?)
Bailing Out Greece And Ireland
European governments faced a no-win situation in 2010 - whether to let large banks suffer the costs of their own greed and stupidity, or whether to socialize those losses to keep the system running. Much as the press talks about how Greece and Ireland were bailed out by European authorities and the IMF, it was really the major banks of Western Europe (and the U.S. to a smaller extent) that got the bailout. While Greece and Ireland face many years of austerity and tough decisions, the banks will quickly get to go back to business as usual - a dichotomy that will likely encourage more foolish risk-taking in the future.
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Not Doing Real Healthcare Reform
The current U.S. administration put an enormous amount of its political capital to work in getting its version of healthcare reform through Congress, but the question now seems to be whether that was worth it. The reform bill appeared to be a key issue in the mid-term elections (which went against the current administration), and it appears to have little to do with actually reforming healthcare itself. While this new policy may ensure that many more Americans have health insurance, there was virtually nothing in the bill that addressed the incredible costs of bureaucratic waste, fraud, nuisance malpractice suits and ineffectual cost-benefit analyses. As a result, healthcare costs could remain a problem for some time to come.
Not Repairing Infrastructure
It is curious to see that as of late 2010, roughly half of the federal stimulus dollars targeted toward infrastructure were still sitting unspent. Long years of experience and numerous studies have shown that infrastructure spending is one of the few arenas where the government can do some good. Even die-hard believers that "less government is better government" acknowledge that the federal government has a useful role in funding roads, bridges, schools and so on. And yet, this activity creeps along far slower than it should. Not only would infrastructure spending be a boon to banks (that would handle the funds) and construction companies (that would put people to work), the follow-on effects and long-term benefits of better infrastructure would help the entire economy for decades to come.
The Bottom Line
It is admittedly easy, and not completely fair, to judge decisions with the benefit of hindsight. That said, if people don't carefully examine their own decisions, and those that others make, future success is more a question of luck than hard-earned experience. Learn from both your own mistakes and those of others, and do what you can to make 2011 a year of as many positive financial decisions as possible. (For more on what to expect in 2011, see 8 Tax Cuts Set To Expire in 2011.)
For the latest financial news, see Water Cooler Finance: Canadian Takeover And U.S. Tax Breaks.