Rear-View Mirror A Poor Guide For Investors Market Timing Poor Substitute For Steady Investing Over Long Period

The stock market has taken investors on a wild, enriching ride this year, with both the Dow and S&P up more than 20 percent.

But lately the market’s been vacillating - particularly the high-technology sector that has been the main driver.

Are the fluctuations a signal to take profits? Or time to put money “in?”

Many pros think stocks can’t possibly do as well in the second half of the year as the first. The economy is slowing, and many expect corporate earnings to level off.

On the other hand, the Federal Reserve has started reducing interest rates and usually doesn’t stop with just one rate cut; and lowering interest rates generally helps stocks.

In fact, some analysts say that growing pessimism about stocks is “good,” since big downturns often follow periods of excessive optimism.

Amid the uncertainty, the average, small investor might repeat the basic mantra: “Invest for the long term, put money in regularly.”

Over time, the stock market goes up and gives investors better returns than bonds, money market funds or bank savings. And since a given amount of money buys more stock when prices are low, investing routinely fills your portfolio with stocks bought at below-average prices.

Unfortunately, many investors - especially mutual fund investors - don’t get into the market until it’s done well, then pull out after it’s done poorly and miss the next upturn, says Carl M. Sheusi, a vice president at PaineWebber, in Philadelphia.

A study by Dalbar Inc., a Boston research outfit, shows that this has caused the average fund investor to lag the market.

Dalbar evaluates the flow of cash in and out of funds to calculate real returns as asset levels and fund performance fluctuate. Imagine all the money was put in by just one person and there was just one fund.

If this person invested $1,000 in year one, and the fund rose just 3 percent, she’d have $1,030. If, in her disappointment, she took out $250 and then the market went up 20 percent the next year, she’d have $936 in the fund.

Of course, the investor could have beat the market by taking $250 out before the year when returns were low, investing it in something that would do better than 3 percent, then putting it into the fund to catch the big rise the second year. But few people can time the market this well.

Dalbar found that from January 1984 through December 1994, the average no-load stock-fund investor had an annual return of just 3.95 percent, compared with 13.52 percent for the S&P 500.

By moving in and out, the average stock fund investor would have seen $100 grow to $153.06, instead of the $403.35 he could have had by staying in and merely matching the market.

That 3.95 percent annual return barely kept pace with inflation.

Or consider another recent study by the American Funds Group. It found that $5,000 invested every year from 1985 though 1994 would have had an average annual return of 13.46 percent if invested on the best day of the year - when the market was at its bottom.

But even if the money was invested on the worst day - when the market was at its peak - the investor would have earned 9.92 percent a year.