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Patience, Please, With That Investment Plan

THE stock market sometimes moves astonishingly fast, yet much patience is required to take advantage of those swift moves. Both of those valuable, seemingly incongruous lessons have emerged from the market’s performance over the last year.

The Standard & Poor’s 500-stock index has climbed more than 24 percent in 2009 — after falling 37 percent the previous year — putting stocks on pace for one of the greatest reversals of fortune in market history. Assuming that stock prices essentially stay put for the next four trading days, this would be the biggest two-year swing in stock returns since the S.& P. 500 lost 26.5 percent in 1974 and then surged 37.2 percent the next year.

Yet many investors missed out on a decent percentage of this year’s rebound, which is typical of investor behavior in sharp market turns, says Russel Kinnel, director of fund research for Morningstar.

“Even when the official returns look pretty good,” Mr. Kinnel says, “investors’ performance can be lousy.”

His firm keeps track of fund performance in two ways. First, it looks at the overall total return a fund generates — the most frequently cited performance figure. But Morningstar also looks at how an average investor in that fund actually fared, based on the flow of money into and out of that portfolio over time. The contrast can be quite revealing.

Over the last year, many funds have shown big gaps between their overall returns and investors’ actual gains.

The JPMorgan Intrepid Multi Cap Select fund, for example, returned 28.2 percent in the 12 months ended Nov. 30. That means it beat the broad market, which was up around 25 percent during that time. But the typical investor in that fund didn’t come close to even matching the market, earning just 8.1 percent, according to Morningstar.

Mr. Kinnel says that such gaps are to be expected in funds that tend to rise and fall faster than the broad market — and whose investors tend to be less patient.

But similar gaps are also showing up in core blue-chip portfolios that are intended to be part of a buy-and-hold strategy.

Consider the Fidelity Mega Cap Stock fund, a blue-chip portfolio that owns some of the country’s biggest stocks, including Exxon Mobil, JPMorgan Chase and Cisco Systems. In the year through November, this large-cap stock fund advanced 28.7 percent. Yet the average investor in that fund fell far short, gaining just 16.8 percent, according to Morningstar.

Why? The simple reason is that many of those investors mistimed the turnaround — fleeing the market when stocks sank in 2008, then missing the start of the rally in early March.

History shows that market rebounds can be so quick that they are easy to miss. Not only are much of a bull market’s gains achieved in the first year, but a good chunk of those first-year gains occurs very early on.

This year offers a perfect example. From March 9, when the rally began, to Dec. 17, the S.& P. advanced nearly 65 percent. But if you sold out of your stocks during the 2008 downturn and came back into the market less than a month after the rally started — say, on April 1 — you would have earned a 37 percent return.

In other words, you would have missed out on 40 percent of your potential gains.

And if you were two months late in timing the rebound and came back into the market on May 1, you would have missed out on almost 60 percent of your potential gains for 2009.

The reality is that many investors did wait too long — because they read too much into past market performance, says Stuart L. Ritter, a financial planner at T. Rowe Price in Baltimore.

But Mr. Ritter says investors who can’t help but look to the past to set an investment strategy should at least look back further into history. He suggests examining the last 15 years.

Not only has the S.& P. 500 turned in a positive performance in every 15-year stretch since 1926, but the pattern of 15-year performances doesn’t vary as much as year-to-year swings in the market.

For example, Mr. Ritter noted that in the 15 years ended in 2008, the annualized return for stocks was about 6.5 percent. And in the 15-year stretch that ended on Nov. 30, the annualized gain for the S.& P. 500 was around 7.5 percent.

Yet the ultimate lesson for investors is that to earn those steady 15-year gains, “you had to have been patient enough to stay the course during those volatile one-year periods,” he said.

IN 2008, when the market was plummeting, the notion of being patient was fairly clear: it meant sticking with stocks even as they were losing value in the short run.

But now that stocks have gained so much, and so quickly, patience may now mean something different: a willingness to book some of your gains in the market and rebalance back to your original, intended weighting toward stocks.

“When we say ‘be patient,’” Mr. Ritter noted, “we mean be patient with your long-term strategy, not the market.”

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com

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