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Investment Success from Base Hits By Stephen J. Butler

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When asked what he thought the stock market would do, J.P. Morgan once said, "It will fluctuate." He certainly got that right. Any glimpse into the future affords nothing but mixed messages, and these choppy markets certainly reflect that uncertainty. Difficult times like this remind me of the story about the mother whose burst of adrenaline allowed her to lift up an automobile to free her child who was pinned underneath. The markets we endure today can bring out the best in us if we approach them constructively and avoid panic.

"Manias, Panics, and Crashes: A History of Financial Crises" is a book written by Charles Kindleberger. He's 91 years old today, but he wrote the book's first edition in 1978 and created an instant classic. Kindleberger feels that we still have a way to go before we reach the bottom of this market, and he shows us what to look for anytime we think we could be in a bubble of any sort. On the other side, we can weigh the current bullish opinion of, say, the Bay Area's renowned money manager, Ken Fisher, who claims to be spotting a lot of bargain stocks in these markets. He's not waiting for the absolute bottom, because he knows how easy it is to miss the dramatic first surge of a market rebound.

Those who bailed out of the stock market any time over the past year or two are probably enjoying some smug satisfaction from the most recent implosion of the past month, because it confirms their belated move. But they wound up moving after the horse had left the barn. I know of very few people prescient enough to have left the market back in '98 or '99. Those who left in '96 or '97 missed out on a doubling of assets that occurred in a few short years on the late '90's. Most of us, as we watch account balances recede, are only giving up a portion of the ridiculously easy money we made as we floated up while perched on that bubble.

Those who feel a need to do something at this late date can consider a few options. First, forget about bailing out of the market. The damage has been done. The first constructive step is to start by reducing costs. Too many of us pay way too much to the financial services industry for money management fees. Saving even a half a percent per year can add up to one full year of earnings in just ten years?making up for a 10% market loss. Many people bemoaning their losses today overlook the fact that a portion of that loss was self-inflicted because they didn't shop for services effectively enough.

Next, the tax hit on money outside of retirement plans can be huge. People focus on the difficult task of picking stocks, and they ignore the simple arithmetic that can lead to tax savings. It is important to save on taxes, because paying them today instead of years down stream can have a major impact on overall results. More and more people?especially couples?will be encountering the Alternate Minimum Tax which can substantially increase the impact of taxes on investment decisions.

Within retirement plans where taxes are not an issue, a further constructive step might be to create a more refined version of an S&P 500 Index fund. Consider an equal mix of a value index and a growth index. Rebalance them once a year by selling enough of the winner and buying the loser to bring them equal again. Back-testing this approach indicates that it can add an additional percentage point per year, on the average, to results attained by just a single S&P 500 index.

At times like this, it is important to just grind it out. Any attempt to second-guess what the market will do next is just a waste of time. We need to channel our anxiety into constructive, simple, mechanical steps that can improve results over time and that have nothing to do with investment prowess. If a combination of reducing costs and taxes (where applicable) can add a guaranteed 2% to our annual returns, this can have a huge effect over time. It could mean $150,000 more in twenty years on a $10,000 annual investment in markets that average 10% per year. If rebalancing adds another 1%, then these steps alone add up to additional gains that total more than we will have contributed.

Years ago, my son Mason ended a little league championship game with a single that drove in a runner from third to win the game. I later asked my 10-year-old what he had been thinking when he had stood at the plate. He said, "I knew I just needed to get the ball into play." We all have been spoiled by those easy home runs we scored in our portfolios back in the nineties, but any baseball fan knows that the singles and doubles are what win games?especially in the clutch. Now, we just need to keep the ball in play?in markets that "will fluctuate."

The securities markets are subject to the risks of fluctuating prices and the uncertainty of rates of return and yields inherent in investing and past performance is no guarantee of future results.