It's now time to focus on buying good companies at cheap prices.
The financial crisis, stock market plunge and ensuing Great Recession have (re)taught us some valuable lessons. Take these 5 for example…
1) Diversify your investments, not just between sectors, but also between bonds, gilts, cash and shares.
2) Banks like HBOS (RIP), Royal Bank Of Scotland (LSE: RBS) and Lloyds Banking Group (LSE: LLOY) are highly complex, highly leveraged entities, and as such, are far from a low-risk investment.
3) House prices can go down as well as up.
4) Share prices can go down as well as up.
5) The economy does matter.
Picking up on the last point, since the financial crisis first hit, many people, including myself, have been keeping close tabs on the economy.
And with good reason too. With interest rates at record lows, unemployment on the rise, the Bank of England printing money like it's no tomorrow and commodity prices all over the place, it has been prudent and sensible to keep a close eye on the economy.
Forget It
But now the time has come to forget the economy and to get on with picking winning shares for the months and years ahead.
The worst of the financial crisis has passed. Banks have been stabilised, and are not going to go bust. Most highly indebted companies are not going to go bust. Your savings are safe in all of the UK regulated banks.
That said, just because the financial crisis has passed, doesn't mean the economy has suddenly recovered. It hasn't.
The recovery will take some time, probably years, maybe a decade. It is going to take a hell of a long time for unemployment to get back down to 2007 levels. It will take decades for government debt to return to sensible levels, and certainly will mean years of higher taxes, lower government spending, and extended working lives for us all.
Work Till You Drop
On that last point, and as somewhat of an aside, working until we are older is hardly the end of the world. Presuming I remain healthy and compos mentis, I fully expect to and want to keep working well into my 70s. I may prefer part-time work as I get older, but having something to do, and something to keep my aging brain active is highly desirable as far as I'm concerned.
From here, the economy could do anything. We could, as HSBC (LSE: HBSA) chief executive Michael Geoghegan said this week, be in for a W shaped recovery.
"I'm cautious about growing too fast... I'm not as convinced we're through the worst as others are."
Unholy Mess
'Cautious' is the key word. There is absolutely nothing wrong with being cautious. After all, it was a lack of caution that got us into this unholy mess in the first place.
Right now, economists, chief executives, investment gurus and mere mortals like myself can't agree on the direction of the economy.
Some think we're in for a period of elongated deflation. Others think rampant inflation is coming, and we should stock up on gold and 'inflation-proof' investments like Tesco (LSE: TSCO) and Unilever (LSE: ULVR).
In reality, no-one knows what the economic future will hold. There are just too many variables.
Stick With Buffett
Right now, investors are better off following the advice of Warren Buffett, who once said…
"Stop trying to predict the direction of the stock market, the economy, interest rates, or elections."
I remain cautiously optimistic. There are some excellent blue-chip companies trading at decent valuations. In the past I've highlighted GlaxoSmithKline (LSE: GSK) as an example. The drug giant trades on a forward P/E of 10 and a dividend yield above 5%. You may not get instant gratification, but likewise, you'll be able to sleep well at night.
Not every company is a buy. I wouldn't be in a hurry to buy shares in some of the FTSE 250 companies that have been bid up to premium valuations, like Bluetooth chip-maker CSR (LSE: CSR) and Carpetright (LSE: CPW).
Cautious Investing To All
All investing should be cautious investing. The key is to identify great companies and to buy them at cheap prices. The really cheap prices are largely gone, but there is still value out there.
It's time to forget the economy and get back the basics of investing.
More on the economy and the markets:
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> Of the companies mentioned in this article, Bruce Jackson has an interest in GlaxoSmithKline.
