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. Last Updated: 07/27/2016

To Ride Wild Market, Just Hang On to Stocks

While 1996 has had some wild ups and downs, that boring mantra -- buy-and-hold -- has served investors well. Look at IBM. In March, it peaked at $125 a share, then skidded down to $90 by July. If you had bailed out in mid-summer (as many did), you would have missed the rebound last week to $122.

The scientific research is even more convincing. It shows that a policy of buying mutual funds and hanging onto them through good markets and bad produces returns that are four times greater than the typical buy-and-sell, in-and-out behavior of actual investors. Four times!

That figure is hard to believe, but it comes from a study by a respected Boston firm that compiles information for the financial services industry.

Since 1984, DALBAR Inc. has been comparing the performance of individual investors with that of the market averages. The latest numbers are startling. Between Jan. 1, 1984, and March 31, 1996, the Standard & Poor's 500 Stock Index, a good proxy for the broad market, has returned 491 percent, with dividends reinvested. But the return over the same period for an investor who bought mutual funds directly was only 97 percent. The return for an investor buying funds through a sales agent (like a bank or broker) was 113 percent.

"The difference," says a DALBAR June report, "is attributable to poor market-timing attempts by investors and the fact that investor cash does not remain invested (in stocks) for the entire period."

In its report, DALBAR summed up the findings this way: "Investment return is far more dependent on investor behavior than on fund performance." You'll never read a more important sentence on investing. Put it another way: What you buy is less important than whether you have the discipline to keep it.

The late investment theorist Benjamin Graham made much the same point when he argued in "The Intelligent Investor" that investors are their own worst enemies. What they do is buy and sell at the wrong times. They get carried away by stock quotations in the newspaper, buying when prices rise and selling when prices fall. If you can manage the opposite, you might make a lot more money than the buy-and-hold investor.

But if you can't muster the courage to buck the crowd, don't try. Just invest your money and leave it. After all, what's wrong with a return of 491 percent in 12 years?

Or consider Gillette Co. A friend said his broker called in April to warn that because the stock had "broken its support level" -- that is, dipped below the supposed magic number of $50 a share -- it was time to sell, quickly. My friend, a buy-and-hold type who wants to own Gillette until Chelsea Clinton's first term in the White House, resisted. A week later, Gillette had bounced back to $55, and last week it topped $68.

reflects the performance of the largest stocks and

For example, over a 10-year period, Morningstar Inc., the mutual fund research firm, reports that U.S. growth stock funds returned an average of 12.0 percent annually; small-company funds, 12.3 percent; aggressive growth funds, 12.6 percent; foreign stock funds returned 10.5 percent. In other words, not much difference. But an investor who stayed out of the market in 1995 because he thought it was overvalued missed a 30 percent increase in his holdings.