Keeping an even keel essential during stormy markets

How can individual investors learn to stop worrying and love the long-term view? Today, I have provided some advice and remarks by Christopher Davis, chairman of Davis Advisors, in this volatile market. 

It's hard to tell where the market is headed these days: It's up one day and down the next. But amid this squall, Christopher Davis seems remarkably calm - even optimistic about the market's long-term prospects.

"Fear and uncertainty aren't the enemy of investors as much as complacency is," says the chairman of Davis Advisors, a money manager with $68 billion in assets. "In a way, the uncertainty and jitters are probably positives. It's a wonderful time to buy above-average businesses at cheaper prices." 

Behind Davis' optimism and opportunistic approach in today's volatile market: a long-term perspective.

"We remind ourselves that we own interests in businesses," he says. "The prices of those businesses may gyrate, but that's of less concern than what's happening to the underlying value. Focusing on value rather than price helps you maintain a steady state of mind."

Staying on even keel is equally important for individual investors, he says. During periods of tumult, many investors sabotage themselves by jumping out of stocks.

How can individuals stay the course? Davis offers three ideas:

BREAK BAD HABITS. Investors are often their own worst enemy. In the last decade, Davis points out by way of example, the best performing diversified stock fund earned 18 percent annually (net of fees and expenses) from January 2000 through December 2009, according to Morningstar.

Trouble is, the typical investor didn't capture any of those gains. Why? Most individuals tended to buy the portfolio after a good run and sell after a bad one. Result: The average investor in the fund lost 11 percent a year (net of fees and expenses) over that same 10-year period, concludes Morningstar, which looks at a fund's cash flows to come up with so-called investor returns.

"The same way some people want to do things that are unhealthy to their bodies, investors want to do things that are unhealthy to their financial well-being," says Davis. 

REMEMBER GOOD MANAGERS HAVE BAD PATCHES. "As my wife says, the secret to our happy marriage was low expectations," jokes Davis. That's good advice for investors, too: Have reasonable expectations. Davis says even the best money managers can underperform the market.

In fact, "it's inevitable," he says. A case in point: A 2010 study by Davis Advisors looked at the top-performing large-cap funds whose 10-year-annualized performance (net of fees and expenses) ranked in the top quartile from January 2000 through December 2009.

Of those 176 top-ranked portfolios, roughly 96 percent experienced at least one three-year period in which their performance dropped to the bottom half of the large-cap universe. Some 79 percent fell in the bottom quartile, with 47 percent in the bottom decile. 

REGULARIZE YOUR INVESTING ROUTINE. It may be easier to navigate choppy waters with regular, periodic investments - through dollar-cost averaging, for instance. Consider what happened from October 2008 through October 2009.

An investor who put a lump sum into the market at the beginning of the period would have lost 8 percent along with the S&P 500, according to Bloomberg data.

Nervous investors who pulled out their money at the market bottom in March 2009 would have fared worse, losing 41 percent. Meanwhile, investors who put a specified amount into stocks each month would have gained 35 percent by the end of the period, notes Davis.

"That's the power of systematic investing," he says. "It dramatically improves investors' behavior." 

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of Morgan Stanley Smith Barney LLC. He can be reached at William.a.creekbaum@mssb.com or 689-8704.