Hesitating Has Hazards, Too

For even the most dedicated buy-and-hold investor in mutual funds, the temptation may be strong right now to stray from the patient, long-term path.

Stock funds are approaching the close of their third straight year of double-digit gains. Every yearend commentary you see on the market outlook will raise the question of how much longer this strength can continue. Many analysts will point out that the last time the Dow Jones industrial average posted three consecutive two-digit annual gains, in 1963-65, it subsequently suffered a loss of almost 19 percent in 1966.

What’s more, the late-October selloff in 1997 has provided a live, in-your-face demonstration of how quickly big chunks of ground gained by the markets can be lost again, at least for a while.

Any responsible fund manager or investment planner takes pains these days to caution individual investors not to expect the payoffs of the past several years to continue at the same pace in the years to come.

All in all, it’s easy to make an argument for cashing in some gains, or at least holding off on new investments until the market gets cheaper. But a “play-it-safe” strategy that gets you into any kind of market-timing effort presents hazards of its own.

There is no way to tally the cost to investors, through the bull market of the past 15 years, of the opportunities missed as they held back their money, waiting for a better time to buy.

But the bill for this kind of wariness has indisputably been enormous - much larger than the dollar losses suffered by everybody who picked a bad time to put up their money, or happened to invest in a fund whose manager was about to go into a slump.

When that ultimate voice of reason and authority, Chairman Alan Greenspan of the Federal Reserve, sounded his now-famous warning about “irrational exuberance” on Dec. 6 last year, the Dow Jones industrial average stood at 6,382. Within a few weeks it climbed decisively above that level, and has never been that low again since.

Maybe it will get back to that point sometime, vindicating the skeptics. But assuming that happens, will those people then know whether a good time to buy has at last arrived, and have the resolve to act decisively on that knowledge?