Smart investors will ride out short-term bubbles and bust

THIS promises to be an interesting year for investors. Last year was a superb year for anyone with the nerve to pile in, and I do not expect to make such a percentage return ever again in my life.

The credit crunch crash was a once-in-a- lifetime opportunity and happy was the investor who got out ahead of it before April.

This is not to say that 2010 won't be good, it may even be excellent, but 2009 is probably unrepeatable.

The long-term picture is that, while the market will rise, it is highly likely that there will be a sharp correction when interest rates spike up and the world's central banks start reining in the vast liquidity that they have extended to forestall credit crunch Armageddon. This will cause a short-term dash for the exit that will whack stock prices by between 20 and 25 per cent in a very short period. My guess is this will be late this year, but the trouble with clairvoyance is often that predictions seem a lot closer than they really are.

Trying to avoid this slump may be futile as there could well be a steep rise – perhaps 20 per cent – before this correction is triggered. Getting out at the right moment and back in again is the sort of trick that we can only dream of pulling off.

The correction will, like most, be short-lived and perhaps delay the recovery for another year. So a stoic investor will just ride it out and try to be in the sort of stocks that won't be too badly hit by the final tremor of the credit crunch.

If we get a rally, it might be a good time to rotate into stocks of a lower-risk profile; companies that, for instance, didn't do too badly in the slump of last autumn.

It is interesting to wonder if the central banks really understand the lessons of the credit crunch yet; the main one being that there is no such thing as free money as enjoyed by many, especially governments, during the inflation of the credit bubble.

When a new breed of zillionaires suddenly appears, it should be a simple matter of following the trail of money back to its origin and unpicking what has caused these "men from nowhere" to suddenly become rich.

If there is no loophole being exploited, then fine; however, the chances are that the kinds of tricks that fuelled the credit crunch and most of the other bubbles that went before will be revealed.

The regulators could then prick that bubble before it got too far out of control. Supernormal profits and systemic risk go hand in hand; extraordinary profits are the smoke signals that indicate trouble ahead.

However, in this modern world where the government is the silent partner taking half of all incomes in tax, the urge to suppress abnormal profits is the same as passing on tax income. As such, there is a structural conflict of interest in arresting the development of bubbles. There will be no end of them.

Meanwhile, the smart investor will ride the cycle and the long-term wave of progress.

• Clem Chambers is chief executive of stocks and shares website ADVFN