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STAYING PUT IMPROVES INVESTMENT PERFORMANCE

- Alan Lavine and Gail Liberman



How long do you hold your mutual funds? One, three, five or 10 years?

Most investors jump in and out of their mutual fund investments based on current performance, says a study conducted by the Financial Research Corp., Boston. Bad move.

The reason: Different kinds of stocks take turns performing well. Now, undervalued stocks lead the pack. In the late 1990s, growth stocks soared. Stocks that pay dividends do well when the economy slows. So do utility stocks. When the economy starts to do well, cyclical stocks begin to gain. As the economy booms, leisure and technology stocks that lead the way.

The bottom line: Diversified stock funds own a large number of stocks in different industries. You get some protection if stocks in a particular industry perform poorly. You also must be patient and wait for a well-managed fund to rack up attractive profits.

The study, published in the Journal of Financial Planning. found that despite investors' claims that they adhere to a buy-and-hold philosophy, the evidence portrays a different picture.

Gavin Quill, director of research for Financial Research Corp., says that you must hold for 10 years or more to have a buy-and-hold investment strategy. Yet, according to his research, as the stock market rose, investors' holding periods shrank from 5.5 years in 1996 to just 2.9 years in 2000.

"Investors, on average, do not act appropriately from the perspective of achieving their long-term investment goals," Quill says. "Too often, they will buy into a hot fund or asset class just as it is peaking, ride it down and then switch to the next hot objective just as it is reaching its top."

Quill's study shows how increased trading hurt investor performance. For example:

  • If investors would have used dollar cost averaging to invest regularly in stock funds, they would have earned 10.92 percent annually over the past three years ending in 2000.

  • Based on what investors really did--they moved in and out of funds, their investment grew at just 8.7 percent annually over the past three years.

  • In a one-year period, dollar cost averaging gained 11.74 percent. By contrast, all that jumping around from fund to fund resulted in just a 6.68 percent gain.

    The lesson from the study is: Buy a well-managed stock fund with a good long-term track record. Look at how a fund performs from year to year. Look for years when it underperforms. Then check when it bounces back. You may see a pattern. And, try to stick with your funds for at least 10 years.

    If you are the type of investor who can't stay put, think about hiring a financial advisor or financial planner. However, keep in mind that you may need at least $50,000 to $100,000 to invest to do so. Plus, it will cost you between 1 percent and 2 percent to hire someone to manage your money.

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    Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).


    To read more columns, please visit the column archive.




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