September 07, 1995

Foolish Teaching Tools
by Robert Sheard ([email protected])

By all accounts, 1995 has been a terrific year for the bulls on Wall Street. The Dow Jones Industrial Average is up 22%, the S&P 500 is up 24%, and the Nasdaq is whipping them both, up 39%. Given those impressive gains, it's no wonder that the market mavens are sounding off about the similarity to 1987, the "over-extended" nature of the market, all the doom-and-gloom scenarios you can imagine. In short, the sky is falling.

And maybe they're right. (Hey, it can happen.) So let's suppose for a few minutes that the gooroos are on the mark and the market is set up for another 1987-like plunge in the last few months. What would that do to the bulls who have been trampling through the Wall Street flower beds all year? What would a 25% haircut do to your portfolio?

Let's look at two bullish investment approaches and work through some numbers together. The first example is the Fool Portfolio. As of September 6, the Fools are up 50% since January. So, if you had stuck your own $50,000 into the Foolish mix, right now your portfolio would be worth $75,000. Now let's slice away 25% for the doom-and-gloom crowd (a figure approximating what the market averages lost in the final quarter of 1987). So, in the market crash of 1995, you will have given back $18,750. But that still leaves you with $56,250, a 13% profit for the entire year.

But for those sitting on the sidelines all year (waiting in cash for the big correction), where will they be at the end of the year? Even after they declare their moral victory ("See, I TOLD you 8 months ago it would crash"), will they be able to top a 13% annual return? Not likely. And if the market doesn't crash? Well, you get to move into 1996 on the wave of a fantastic 1995.

The second example is even more comforting. The Investing for Growth portfolio is currently sitting on a 73% return since January. That same $50,000 stake we used in our first example would be worth $86,500 using the IFG return. Shave off the 25% for the fourth-quarter crash and the balance drops to $64,875. That still represents a 30% gain for the year. I'd be willing to stack that up against the bears who have been in cash all year waiting for the market to drop.

What's the point? Simply put, moral victories don't add to your retirement account. With a fully-invested strategy, you have the benefit of the long-term probabilities on your side. Over the last seven decades, the market has had one long-term trend---up. If you'll wait out the short-term blips, even painful ones like 25% drops in 1987 (and in 1995?), the fully-invested approach still beats the market timers. If the market drops 25% later this year. . . oh well. . . then 1995 is only a good year, not a phenomenal one. If it doesn't drop, chill the champagne and kiss a Fool! Either way, you're better off than you would have been if 9 months ago you decided it was Wiser to "sit this one out."

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