Archived Message from Ed - December, 2002

Congratulations to Patty Anacleto for winning our contest for a dinner for two. Check out the "Parenting" section of our Lifestyles page to see Patty's added links that won our contest.

The most common question I have been asked by clients recently is: "Should we change our investments to something conservative until the market has turned around?" Let's look at this strategy...

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If we change our investments to something conservative until the market has turned around, how would we know when to switch back to good long-term investments? Well, we would look for a good uptrend in the markets. Right now, the markets are up 20-25% from the bottom and have risen for 8 consecutive weeks. Is this a good uptrend? Maybe. When will we feel more sure? The answer usually turns out to be to wait until the markets have risen by 30-50%. If we do this, we will miss the first 30-50% of the rise. Does this sound like a good strategy?

Statistically, this type of market timing does not work. Research has shown that the average investor earns 4-6%/year less than the actual investments they own. The best example of this is the Fidelity Magellan Fund. This fund averaged more than 20%/year for a 15-year period from the late 1970's to the early 1990's. However, the average investor in that fund during that time actually lost money! How did this happen? Most of the investors continually bought after a strong rise and sold when it had gone down. In short, they bought high and sold low. Even though we all know we should "Buy low and sell high", we are always tempted to do the opposite.

What is the best strategy? All my clients already have their investments managed by an all-star team of fund managers. We want to be invested with them long-term and earn the returns that the funds earn (or better), so we can achieve the goals we set. To do this, all we need to do is invest consistently in up and down markets and stay invested. To get even higher returns, we need to invest more when the investment is low and less when it is high. In other words we should do the opposite of what we are tempted to do - we should switch our more conservative investments to more aggressive investments while the market is low.

As humans, we tend to think linearly - the market has been going down, so it will probably continue to go down. The truth, however, is that markets always move in cycles. Every down cycle is followed by an up cycle - and up cycles have usually been much bigger and longer lasting than down cycles. In short, we have many great reasons to believe that 2003 will be a great year!

Stay tuned for our next message when we will discuss these reasons why 2003 should be a great year...