Glenn, seems to be an interesting article from IBD, though I don't really agree with what they say :
"Days You Can't Afford To Lose; Missing Upswings Can Be Costly"
Date: 1/9/98
Author: Adam Shell
Tom Orecchio likens long-term investing to traveling by rail. ''The stops
along the way don't matter,'' the Oradell, N.J.- based financial adviser
said. ''What matters is that you reach your ultimate destination.''
His point: Don't bother trying to time the market.
That's good advice. Yet many investors, spooked by market dips, exit
their funds long before they reach their financial goals. Regrettably, they
often miss out on one or more of the market's explosive, single- day
surges before jumping back in. The bottom line: Shrinking total returns.
Want proof? We've got it.
IBD asked CDA/Wiesenberger, a fund-tracking firm based in Rockville,
Md., to look at five of last year's top funds to see how missing out on their
five best days would impact total returns. The funds analyzed were
American Heritage, Gabelli Value, Oakmark Select, Hartford Capital
Appreciation, and MFS Mass Investors Growth Stock.
Take Gabelli Value. The fund surged 48.23% in '97. But its two biggest
single-day gains came after the Oct. 27 market rout. It rebounded 3.03%
on Oct. 28 and skyrocketed 10.73% on Dec. 22.
Say you panicked and dumped all your shares on Bloody Monday - and
were too scared to get back in. Your one-year return would be just
29.93%. Those two missed opportunities shaved 18 percentage points off
your annual return. Had you invested $1,000 at the beginning of '97 and
held on despite the market's frightening fourth-quarter gyrations, your
balance would have swelled to $1,482.32. Subtract out the two biggest
days and you'd finish with just $1,299.29.
Stay Fully Invested
''Over the long term, you're better off staying fully invested,'' said Marjorie
Greenspan, managing director of Towneley Capital Management in New
York. ''In the short term, it's very easy to get burned by trying to jump in
and out of the market.''
Greenspan's got the data to prove it. A 1996 study done by her firm
tracked stock-price fluctuations between 1963 and 1993. It found that a
buy-and-hold investor would have enjoyed an average annual return of
11.83%. The key finding: 95% of the market's growth occurred on only
1.2% of all trading days. Missing the 90 best trading days - that's only
three per year - produced an average annual return of only 3.28%.
Said Greenspan: ''If you're out of the market and miss the big, upward
spurts, your returns suffer. Period.''
Sometimes, being out of the market one stinking day is all it takes.
American Heritage, the top-performing fund of '97, shot up a breathtaking
75%. On Jan. 30, its top day, the fund soared 14.93%. Subtract that
skyward spike and your annual return would have slumped to 52.27%.
What's worse, if you had missed the fund's top five days, your one-year
return would have plummeted to a very ordinary 12.32% If you had
stayed fully invested for the entire year, your $1,000 investment would
have swelled to $1,750. Remove the five best days and you'd have
finished with only $1,123.24.
One thing is clear: The numbers don't lie. Sure, there's bumps along the
way. Yet it still pays to stay the course.
So why do so many investors liquidate their positions at the first hint of
trouble?
''Most people can't live with the ups and downs,'' said Kathleen Gurney,
an expert on the psychology of risk and CEO of Financial Psychology
Corp. in Incline, Nev. ''Most investors are either fascinated or stunned by
short-term events like the '87 Crash. Unfortunately, they place a much
greater emphasis on their losses.''
What's interesting is that hopping in and out of the stock market doesn't
necessarily lower your risk. The Towneley study found that the standard
deviation was 12.9% for the 30-year buy-and-hold strategy. Missing the
market's ''worst'' 90 trading days in the '63-'93 period ''decreased
standard deviation to only 11.6%.''
10% Hit
Oakmark Select, a concentrated fund with a value bent, delivered a
55.03% gain to its investors who stayed fully invested for all of '97. Take
away the No. 1 and No. 2 days, and the return would have dropped to
45.23%. That's a 10% hit. Not too long ago, investors would have been
happy to book such a double-digit gain for an entire year.
Two of the fund's best days came after the Dow's record-setting
554-point slide Oct. 27. Timers who fled the market the day stocks were
in a free fall probably weren't around for the fund's subsequent 2%-plus
rebounds on Oct. 28 and Oct. 31. In fact, take away Oakmark Select's
top five days and that eye-popping 55.03% return sinks to a still
impressive, yet less inspiring, 36.07% gain.
Often, missing out on big gains is a greater threat to your financial health
than avoiding the down days.
''You can't go back and make up for missed opportunities,'' said
Orecchio. ''If you sell, you not only lock in a real loss. You also miss out
on the upside because you're out of the market and can't participate.''
When To Get Back In
Orecchio says the big problem with market timing is you have to decide
when to get back in. That's not easy.
Had you dumped your shares of Hartford Capital Appreciation in April
and not bought the fund back until after May 6, you'd be shaking your
head in disgust. The fund had a stellar year, returning 55.11%. But three
of its best days came between May 1 and May 5. Take out the 3.61%
gain on May 5 and the 3.59% uptick on May 2 and you're annual return
would shrink to less than 45%.
''Market timing is an ineffective strategy for mutual fund investors,''
summed up Dan Phelps, a senior analyst at CDA/Wiesenberger. ''Every
growth fund should be a buy-and-hold investment.''
So the next time the market swoons, risk-maven Greenspan offers this
advice to avoid selling: ''Stay away from the phone. Or better yet, take a
vacation.''
(C) Copyright 1998 Investors Business Daily, Inc.
Metadata: E/IBD E/MMUT E/SN2 |
