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Good investing takes discipline, time

Updated: May 3, 2013 12:14PM

Originally published: August 7, 2001

There’s a lot of bad news arriving in the mail these days. You’ll find not only the credit card bills from your December shopping splurge, and the new income tax forms, but some very unwelcome news about your investments.

Mutual fund shareholders are receiving their year-end statements, and for many investors, they come as quite a shock. Suddenly, you’re face-to-face with the tech stock disaster.

That’s reflected in the letters, e-mails and everyday questions I receive from readers wondering what to do now.

Three tales of woe

There’s the father who invested in Illinois’ college plan--not the guaranteed tuition plan of CollegeIllinois! or the tax-free Illinois municipal bond plan, but the investment-oriented “BrightStart” plan. It’s worth less than when the account was opened in April.

There’s also the young manicurist who confided that last March she invested her savings in a tech fund--right at the top of the market. How many manicure tips does it take to make up for thousands of dollars lost in a mutual fund?

Even the corporate employee who heard my speech about long-term investing e-mailed her concern. “I’m about $200 up right now, but it was about $1,000 a year ago. So far, I haven’t lost my initial investment. My question is, should I stay in this mutual fund and ride out the storm, take it out and invest in another fund or put what’s left in the bank?”

All three are asking the same question, but the answer might be different for each, because, even though they might all be invested in the same funds, their personal situations are different. That not only means different levels of pain, but different financial and emotional ability to stick with their investments.

The first step in any decision-making process is to understand the facts.

Reality check

Fact 1: If you lost 50 percent of your money, it will take a 100 percent gain to make you even. That’s a simple mathematical equation. Your stock or fund shares will have to double from here, just to get you back to where you started.

Fact 2: Over the long run--and I’ve always stressed that the long run is a 15- to 20-year horizon--the stock market has far outperformed safer investments, such as money market accounts and CDs. In fact, according to a study by Chicago’s own Roger Ibbotson, there has never been a 20-year period, going all the way back to 1926, when you would have lost money in a broadly diversified portfolio--such as the S&P 500 stock index.

Fact 3: There have been fairly long periods when the stock market has declined--and stayed down.

Fact 4: Over the long run, stocks are a great investment--but not all stocks. Even the most popular stocks of one investment era might become the losers of the future, either because their business plan or product loses its luster.

A solution

Now you must add your own emotions into the equation.

Yes, over the long run, stocks are a winning investment. Yes, in the long run, a diversified portfolio will recoup recent loses and move upward. Yes, if you stick with a plan of regular investing--a fixed dollar amount each month--you should come out way ahead. But it will take discipline, and a long-term time horizon.

To hope for a shorter-term rebound is only human. To plan on recouping losses quickly is folly. If college is 15 years away, or if retirement withdrawals won’t start for 10 years and are expected to continue for 25 years, then stocks are the most appropriate investment.

If your horizon is only five years or less, only you can make the tough decision about taking your losses now. There’s a key question to help you make that decision: Would you feel worse if you sell now and the stock rebounds? Or would you feel worse if you don’t sell and the stock drops more?

Remember, if it were that easy to make money in the stock market, we’d all be rich! And that’s the Savage Truth.

Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail at savage Her third book, The Savage Truth on Money, recently was published by John Wiley & Sons Inc.

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