Patience pays dividends, too

by Stephen Butler

til 2006, our real investment tracked the hypothetical 10 percent line falling off slightly by the end of 2007.

We all know what comes next. Our real investment drops straight down while the mystical 10 percent line leaves us in the dust. In an attempt to create a psychological safety net, however, I had also entered a string of numbers representing an 8 percent annual rate of return over the same 34-year period. Guess what? That line intersects where we happen to be today, our original $1,000 is still worth about $14,000, an 8 percent return, and 14 times our original investment.

So, where do we go from here? Who knows? To get back on track, the market would have to have one of those dramatic periods like it had back in the 1990s. In a four-year period, it gained more than 20 percent per year and one of those years the gain was 32 percent.

Results this dramatic can quickly double market values. In the middle of the 1930's, the stock market had a year when it gained 54 percent. A string of years at 15 percent or more - such as from '76 through the early '80's - could also do the trick. Surprise market gains tend to happen when everyone is the most pessimistic. That's when professional money managers have lots of cash sitting on the sidelines and have the resources to buy.

The market still has some volatility to work out as hedge funds continue to add to the $40 billion that they have had to sell to meet redemption demands. To try to second-guess when this selling and downward pressure may come to an end is like "trying to catch a falling knife" as one financial writer put it. I've decided not to wait. It was time for me to rebalance. What might have been a 50/50 mix of bonds and stocks has suddenly become 40/60 bonds to stocks.

Anyone making an adjustment to get themselves back to the mix they had in September of last year will be rewarded for that step, sooner or later.

And in the meantime, the difference between a current 8 percent return and that mystical 10 percent return can be recovered in ways beyond just passively waiting for better times.

Take a look at fees to see if you can save at least 1 percent per year. Then, bear in mind that we have been comparing only the S&P 500 index as our only alternative. While that index outperformed 95 percent of all funds for the 20 years leading up to 1999, it hasn't done nearly as well as a combination of small company, REIT and foreign funds over the past 10 years.

Diversifying into stock funds other than the market index could generate the extra oomph a portfolio could use to get it back on track during the next big market surge.

At the end of the day, the market is like golf, a game of endless hope. But unlike golf, there is an enduring tide that raises all of us, regardless of our skill level. In the sport of money management, it's patience far more than skill that leads to a favorable outcome.

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