Eight key financial lessons for the small investors from the year 2011:

1. Diversification really works:

The biggest lesson of 2011 is also the oldest. It found a forceful reinforcement as the investors, whose portfolios had a wide spread across asset classes, sectors, or even geographies, reaped benefits. In equity funds, diversified plans (down 23.5%) fared better than some sectoral funds (infra, banks down 31.5%). "India is considered to be among the top performing markets, but in rupee terms, it was among the worst performers in 2011," says Arindam Ghosh, VP and head of retail, JP Morgan Mutual Fund.

2. Insure against natural disasters:

Most of the damage in Japan was paid for by insurance. "This stresses the need to cover life, property and health," says Suresh Agarwal, executive vicepresident and head of distribution, Kotak Mahindra Old Mutual Life Insurance. Even though the cost of insuring a house for Rs24 lakh is only Rs5 a day, not many Indians have covered their houses against disasters. Covering the contents of the house is a little costlier but equally important. The cost far outweighes the benefits of insuring your valuables.

3. Stay away from easy money plans:

Those who had flocked to SpeakAsia to fulfil their dreams are today ruing their decision to join the company. The online survey company has not paid them any money and there is no telling whether it will be allowed to resume its operations in India. ET Wealth saw this coming much before the authorities clamped down on SpeakAsia for being a pyramid scheme. For small investors, the lesson is simple: stay away from schemes that offer easy money. Remember, there is no short-cut to riches. Only diligent saving and intelligent investing can get you there.

4. Shun stocks with too much debt:

There's nothing wrong with promoters pledging their stake as collateral. The trouble is if they pledge a large chunk of the equity. Bear cartels are forever on the prowl for such firms, for even a good stock can go into a tailspin if a big portion of the stake is pledged, triggering a sell-off. The GTL stock has fallen over 90%, from Rs 407 to Rs 35, since June 15 when rumours of pledging first surfaced. KS Oils is another horror story. In November, Parsvnath shares crashed 50% as panicky financiers off-loaded.

5. Even approved projects are risky:

For property buyers, government approval for a project is practically a touchstone. The imbroglio over Noida Extension has changed this perception forever. After the Allahabad High Court struck down the acquisition of land at Chak-Sahberi village in Greater Noida, government projects will no longer be seen as risk-free. Fire Capital CEO Om Chaudhry advises buyers to invest in projects that have an institutional participation. "It's safer as banks and financial institutions exercise due diligence for the project," he says.

6. Look beyond FDs for debt investing:

At the beginning of the year, banks were luring deposits with rates of 8-8.5%. Anybody who locked in at that rate would have lost out when the rates touched 9-9.5%, even 10% for certain durations. On the other hand, investors in shortterm debt funds gained from the rise in interest rates. Debt funds are liquid and more taxefficient than FDs. Now that the interest rate cycle has peaked, long-term debt funds look promising. "Investors need to look beyond FDs for debt investments," says Ghosh of JP Morgan.

7. Factor in inflation in your returns:

How much did you earn from your FD this year? Even for someone in the zero tax bracket, the return would not have been more than 1-2%. This is because the high inflation that raged in 2011 would have pared the real returns. "Investors should not get carried away by the rate being offered," says PV Subramanyam, financial trainer with Iris. While a small investor can't control the rise in prices, he can control his expenses. "If you have a financial plan, it tells you when you overspend or underinvest," says Sumeet Vaid, a financial planner.

8. Asset allocation is the key:

Diversification has limited utility if you don't rebalance your portfolio. 2011 was a year of divergent returns from different asset classes. Stocks fell but fixed income options gave good returns and gold shot up. If one asset class runs ahead or lags, the investor must periodically reset the balance. This disciplined approach holds the key to successful investing. "The investors who maintained their asset allocation emerged relatively unscathed," says Jayant Pai, vice-president of Parag Parikh Financial Advisory Services.