American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Aug. 2001 – The Temptation to Time

We have gone to great lengths to explain to our readers and our clients that successful investing requires discipline. In particular it is vital that investors ignore the temptation to look backwards and bemoan what they could have done with regard to picking certain assets or timing the market.

The table below depicts the total returns for the S&P 500 (dividends reinvested) for the past three calendar years, and what those returns would have been had an investor missed the best ten days and the worst ten days of performance. For example, during 1999, an investor who merely held the S&P 500 for the entire calendar year would have seen his holdings grow by 21.03%. However, had he been tempted to try and “time” the market, and had he been unlucky enough to miss the 10 days with the best performance, he would have missed a cumulative 26.37%, and his portfolio would have lost 5.34% as a result. Conversely, had the investor instead been “all in cash” for the ten worst days, his portfolio would have grown by an impressive 45.29%.

If you can pick the winning periods, please send us your resume. We cannot, and investment newsletters or advisors who claim to be able to do so should be avoided. The next time you receive a sales call, you might ask the solicitor why he has to make his living making cold calls if he has such remarkable insight about what the market will do.

The market continually provides these lessons, yet every day in the print media, radio, and increasingly on television we are barraged by the views of pundits explaining exactly why the market did what it did and what is likely to happen next (the latter usually liberally laced with “qualifiers”). We urge our readers to adopt and maintain a passive portfolio and, except perhaps for its entertainment value, ignore all the rhetoric.

Also in This Issue:

Options Explained
Our Investment Approach: Frequently Asked Questions
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield