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Staying the Course in Difficult Times

Written by Bob Morrison.

The stock market has done much, much better over the past two decades than many of those who invest in it.

And hearing the reason why may make you a better investor.

According to Boston-based research firm Dalbar, Inc., the average mutual fund investor achieved an average annual return of 3.8% over the 20-year period ending December 31, 2010. But the S&P 500, a broad gauge of the overall stock market, had an average annual return of 9.1%.

If an average mutual fund investor had started with $10,000 two decades ago, he would have had $21,084 by the end of last year. The equivalent S&P 500 result, even factoring out investment expenses, was an increase from $10,000 to more than $55,000.

How could this be? I believe investors' lack of discipline—their emotional response to the market's ups and downs—is to blame. Human nature causes people to pull their money out of the market when the market is down. That's the worst possible time to act, of course: By selling low, you lock in losses, and eliminate the chance to participate in all of the market's rebound.

Sure, investors typically get back into the market, but it's often when the market has regained its lost ground. What happens in such cases is textbook self-defeating behavior by investors: They sell low and buy high. No wonder they lag the stock market so badly.

I firmly believe that the key to investment success is remaining in the market for the long haul. And that's why I, and any good financial advisor, will urge you to stay disciplined and avoid the temptation of jumping in and out.

Now may seem like a particularly scary time for the nation's economy. But the truth is that these sorts of crises of confidence have always occurred. And the economy and the stock market have always found their way back: Over the long term, the economy has expanded and the markets have risen.

The history of our capitalist system provides reason for optimism. Right now, I'm optimistic because the fundamentals are so strong: Corporations are highly profitable, for example, and the unemployment rate is decreasing, however slowly.

There's even reason for optimism about the housing market. Generation Y is as large as the Baby Boom generation, and they will need housing. That demand will ripple through the economy, creating more business opportunities everywhere from mortgage banking to the home furnishing industry.

Looking further ahead, I'm confident about the next couple of decades as well. I believe we will see technology and products that we can't even anticipate, and that will change the way we live. The entrepreneurs and innovators driving these developments are the Henry Fords and Bill Gates of tomorrow.

Even our country's most vexing challenges, from energy dependency to healthcare, have a silver lining. America's best and brightest will develop solutions, and the market will rise on the power of their innovative spirit.

How can you as an investor benefit from what's to come? Simple: Stay the course and stay invested.