2008 hit investment portfolios around the globe like a sledgehammer. How could this happen?

Many proclaimed the sky is the limit after the Dow (AMEX: DIA) broke 14,000 in October 2007. Former big-shot Wall Street analysts dreamed of Dow 20,000 while mainstream media highlighted a “de-coupling” of the markets as a cure-all and prevention to market foes.

Even though Dow 14,000 was less than 15 months ago, it seems like years have passed since.

Again, how could this happen? In short, investors were misguided. When a blind is leading a blind, both will fall into the pit.

On March 11th, Jim Cramer firmly said “No! No! No! Bear Stearns is not in trouble.” A week later Bear Stearns was no more. On March 14th, President Bush said “The market will correct itself.” The S&P 500 (AMEX: SPY) kept “correcting” and tumbled another 30%.

Political and financial leaders did not provide the common sense guidance investors were hoping for. As a result, the ’08 sledgehammer cracked even the best constructed asset allocation models and pulverized portfolios built on a shaky foundation.

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2008 has gone, 2009 is upon us. Unfortunately a new tax and investment year doesn’t wipe away all your troubles. Neither does it give you a clean slate. Losses are losses, even if “just on paper.”

As bleak as things may look, now is not the time to throw in the towel. Even investment pro’s like Warren Buffett are feeling the squeeze, and chances are you are still doing better than once famed mutual fund managers like Bill Miller. You may have stumbled, but you can still walk, even run. 

Let’s take a moment to see what we can learn from 2008 to profit in 2009.

Lesson No. 1 – Know who you can trust

Jim Cramer and President Bush were wrong. In March, Ben Bernanke said that large banks won’t run into trouble. A few months later, Washington Mutual became the largest failed bank, ever. T. Boone Pickens expected to see $150/ barrel oil at the end of 2008. Bill Miller, who spent nearly two decades building his reputation as the era’s most savvy fund manager, destroyed his reputation in less than 12 months. If you can't trust financial icons, who can you trust?

2008 was the year of permanent doomsayers. If you followed them all along though, you would have lost out on the markets massive gains from 2003 to 2007. Permanent doomsayers, like a broken clock, are right at least twice a day.

Unlike the mainstream media, ETFguide has been warning its subscribers since the end of 2007. On December 24th 2007, CNBC invited me for an interview with Maria Bartiromo. Maria’s straight forward question was: “How do you make money with ETFs in 2008”? 

Controversial at the time, I said: “First you have to take a step back and look at the bigger picture, the Dow has gone from 7,800 in 2003 to just over 14,000 in October 2007. With this in mind, you have to ask yourself, how much life is left in this bull? A strategy that profits from a topping stock market would be the way to go in 2008.” Our balanced guidance is now available via the ETF Profit Strategy Newsletter.

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Lesson No. 2 – Put diversification in its place

Diversification is a powerful tool but it is not the cure-all to market meltdowns. The goal of diversification is to hold asset classes that boom while other holdings bust. Like a teeter-totter, booming asset classes are supposed to neutralize busting asset classes.

Until Q1/Q2 of ’08, busting equities were neutralized by booming commodities. Shortly thereafter, all asset classes melted away and losses piled up as red ruled the board.

Broad based equity index ETFs (NYSEarca: VTI), broad international equity ETFs (NYSEarca: EEM), broad bond ETFs (NYSEarca: AGG) and commodity ETFs tumbled. Gold (AMEX: GLD), silver (AMEX: SLV), oil (NYSEarca: USO), rice, wheat, soy and corn (NYSEarca: DBA) fell between 30% and 70%. There simply was no safe haven to be found.
 

Lesson No. 3 – Don’t try to pick a bottom

Many investors relied on a government bailout to drive their portfolio higher. But even after several bailouts, the Financial Select Sector SPDR (AMEX: XLF) is still down 60%. Defensive ETFs like the Consumer Staples SPDR (AMEX: XLP) and HealthCare SPRD (AMEX: XLV) recorded their biggest losses after the bailout.

Like post-Christmas shopping at a 60% discount, it is tempting to buy a sector or sector ETF at huge discounts. However, as long as the indexes bounce from one low to the next, picking a permanent bottom is like catching the proverbial falling knife.

To profit in this bear market will take discernment, discipline and common sense. On October 2nd, the day the $700 billion bailout was approved by Congress, we issued a bold, special bailout report (available to subscribers of the ETF Profit Strategy Newsletter).

This two-page report concisely (and accurately) analyzed why the bailout won’t work. The Dow dropped from 11,000 to 8,500 in a matter of days. Just two weeks later (with the Dow at around 9,000) we explained why the Dow will have to fall below 7,500 before rallying into November and December. 

2009 is going to be tough for the economy but it doesn’t have to be tough on your portfolio. Many so-called financial gurus revealed their true colors in 2008. Don’t stick your head in the sand now. Analyze whose advice you can trust to profit in 2009 and don't listen to "gurus" who cost you money in 2008.

As the Dow has clawed its way towards 9,000, the question is whether this is a break-out to higher highs or the best opportunity to cash out and sit on the side lines or use short ETFs. The ETF Profit Strategy Newsletter highlighted Dow 9,100 as an important level weeks ago. The newest issue includes a full 2009 forecast with powerful, easy to use ETF profit strategies.

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