Investing for the Long Run

There's a fine line between the optimist and the masochist. Individual investors may be forgiven for wondering on which side of the line they reside.

Being an optimist myself, I don't particularly like busting other people's bubbles -- we've had enough of those lately. Nonetheless, for my inaugural Long Run column, I have to begin on a negative note: Investing isn't going to be easy the next few years.

"For the long haul, we're going to be in for a period of fairly tough markets," says Ralph Wanger, manager of the (ACRNX)Liberty Acorn fund since 1970. "You're going to have to have substantial skill to prevail, because you can't wait for the markets to bail you out."

If you're still reading -- indeed, if you're still checking out TheStreet.com and other financial news publications -- then the bear market hasn't scared you away. That's wise, because stocks remain investors' best bet for the long haul. However, we are in a new era, only not the one people were touting a few years ago.

From August 1982 to March 2000 -- the greatest bull market in history -- real returns averaged 15.6% a year, according to Jeremy Siegel in his book Stocks for the Long Run. That's more than double the historical rate of equity returns. Regression to the mean hasn't been fun.

This doesn't mean that you can't make money. It simply means that the rules of the game have changed -- and some tried-and-true rules have returned with a vengeance. Investors who adapt to the changes will fare better than those who are still using the old playbook. The Long Run aims to help long-term investors succeed in this new era, whether the market goes up, down or sideways.

In the coming weeks we'll discuss some smart investing ideas for the long run. But this week, let's start out by revisiting the Rules of the Game.

Know Thyself

There are plenty of investing strategies out there -- buy and hold, deep value, active trading, index investing. The first real step investors should take is determining exactly what type of investor he is.