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Time, not timing, is key to successful investing in challenging times

The last few years have been a real challenge for investors. Going from peaks to valleys has tested the resolve of many people – most who consider themselves “long-term” investors – and common wisdom suggests more volatility is expected.

That, of course raises the question: What should I do now?

John Bogle has been through many bear markets. In 1974 he developed the concept of index investing by creating a mutual fund that simply follows the performance of major market barometers such as the S&P 500 stock index.

In a speech delivered in March 2008 – a time that found the stock market in absolute turmoil – Bogle suggested to investors, “Don't do something, just stand there.”

“Stay the course because successful market timing is nigh on impossible, and over time the productivity of our corporate enterprises will create value. Put another way, I believe that ten years from now, earnings in the S&P 500 will be a lot higher than they are today,” Bogle told the Asset Management Performance Summit.

That was a pretty gutsy call as the stock market was in the midst of a freefall. Equity prices continued to decline for another year after his speech, bottoming out on March 9, 2009, with the Dow Jones industrial average dropping to 6,547, a five-year low.

Of course, emotions can sabotage the efforts of even the most committed long-term investors, many who finally fled the market as price declines climaxed. And, unfortunately, they remained on the sidelines as the markets recovered.

A new report from the National Center for Policy Analysis asked the question, “Is the Mattress a Good Place for Money?” First published in 2009, the NCPA Brief Analysis found that even during a tumultuous year for the market, a stock index fund outperformed a bond index fund, a money market account or simply hiding the money under the mattress.

“Everybody has their own comfort level when it comes to investment risk. But selling and shifting money out of an asset when it is priced low is a sure way to lock in a loss,” said Pamela Villarreal, author of the NCOA study.

The best intention of investors who pull away from stocks when prices are plunging probably is to return to the market when things improve. However, such a strategy is riff with risk.

A study by Eaton Vance shows that missing strategically import days can erode the return of a stock portfolio. The report studied the performance of the S&P 500 stock index over the past 25 years, a period spanning from Dec.31, 1985 to Dec. 31, 2010. During that time the index realized a cumulative return of 495.25 percent.

$10,000 invested in the S&P 500 stock index for the entire 25-year period would have grown to $59,525. Eaton Vance said that there were approximately 6,300 trading sessions during the time of the study. Had an investor reacted to situations and missed the ten best days in the period, the portfolio value would have only grown to $28,723.

Even more dramatic, had an investor missed the 30 best days out of the 6,300 days of trading, the annual return would have dropped from 7.40 percent to 0.60 percent.

“To underscore this point, many of the worst days for the S&P 500 were quickly followed by the best days. In fact, five of the ten best days occurred within ten calendar days of the worst ten days based on percentage decline,”cites the Eaton Vance report.

As an example, on Oct. 19, 1987, the S&P 500 suffered the biggest one-day decline in stock market history, falling 20.47 percent. Two days later the index had one of its best days ever, rising 9.10 percent.

How likely would it be that a person who bailed out of the market during the collapse on Black Monday would have had the nerve to get back into stocks just two days later?

To be sure, even John Bogle would never suggest that most investors be 100 percent committed to the stock market. He admits today he has most of his money invested in bond index funds, something he believes to be appropriate for a person his age, 82.

Bottom line, the old expression, “it's time, not timing that makes for successful stock investments,” continues to be as true today as it ever has been.

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