Battling the Bears

A year ago, an article advising you to ignore a few market-timing bears that had crept out of the woods following a 12% rise in the Standard & Poor's 500 in five months. A 12% rise, mind you, that was fresh on the heels of a 23% loss in 2002.

However, a year after the article appeared, the Dow and S&P 500 are up about 15%, and the Nasdaq is pushing a 25% gain.

So what?
I bring this up not to say "I told you so," because I didn't. As it was explained then, the fact is that no one had any idea where the market was going in the near term. Instead, I'm calling this to your attention to remind you of a basic investing tenet: We buy companies with the intention of holding them for a very long time. Stories can change, of course, and we may very well sell after a short period.

Over your investing lifetime, you'll have several losers and several marginal winners. If you've chosen well, however, you'll also have a small handful of massive, multiyear outperformers, and if you follow the "buy right, sit tight" strategy and hang on to those winners, your chances of significantly beating the market are greatly enhanced.

If you've sworn off individual stocks and invest only in an index fund, you have even more reason to ignore the pundits and gurus trying to scare you out of the market. As I said a year ago, it's perfectly valid to discuss the valuations. But the total market is a different issue entirely.

Take a look at this logarithmic chart of the Dow Jones Industrial Average from 1929 to present. It beautifully points out both the risks and rewards involved in stock investing. It's hard to pick a random point that does not see the chart higher 10 years later, and, of course, the entire 75-year period shows average returns of about 10% per year. Yet nothing is risk-free, and those who first entered the market with a lump sum in 1929 had to endure many years before they earned back their principal.

And yet, as Benjamin Graham pointed out in his classic "The Intelligent Investor", a person who began dollar-cost averaging into the market in 1929 would have earned more than 8% compounded annually by 1948 -- despite the fact that the Dow's value fell from 300 to 177 during that period!

Invest through thick and thin, my dear Friend. Don't bother timing the market.

Different paths to victory
Keep Dollar-cost averaging. Consistently buying. Holding on to those securities. Some may wind up like the legendary Shelby Davis, owning hundreds of stocks worth millions of dollars.

Don't let that scare you. Although a fine way to invest, that type of diversification isn't for everybody. Perhaps you'd rather own very few stocks at any one time -- similar to the Warren Buffett punch card strategy. That's valid also, especially for the more experienced.

But whatever your preference, we encourage you to start investing if you're not yet doing so and continue investing if you have. Years later, you'll be glad you did.

Courtesy - By Rex Moore (Fool.com)