Despite the Flow of Red Ink at Fund Firms, Think Twice Before Bailing Out

Remember that last year's summer selloff was followed by a runup of more than 40%.
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Go ahead. You know you want to. Do it!

Sell.

Yep. Take the money off the table, sit on some cash and wait out this market mayhem.

That's what you're hoping I'll say, right? Despite Wednesday's rally, are your eyes glued to the flashing red minus signs on your computer screen? Do you cringe every time you check your portfolio?

"Sell" has a nice ring to it during wild weeks like these. With the market doing so much, it's natural to want to do something, too.

Hold on a second. Unless you can answer these questions definitively, think twice before bailing: How low can we go before bottoming? And when is that going to happen?

I don't know about you, but my crystal ball isn't that clear. If you're not an experienced trader who has done this for a while and for a living, it just doesn't make any sense to try to time the market. That's why so many daytraders lose money.

But that's exactly what fund investors are doing. The red ink is flowing at fund firms as shareholders yank their money for fear of losing more.

It's important during a downturn to remember the last time this happened: the selloff of 1998. According to

Morningstar

, the average U.S. diversified fund was off 26% from July 16, 1998, to Oct. 8, 1998. That's a big enough minus sign to make anyone consider getting out.

But since then, funds went

up

on average -- not down -- by more than 40%. Which means that if you had bought at the very worst possible time -- the market high right before the plunge -- and sat tight through this past Friday, you'd still be up by about 4%. (And don't forget that you would have avoided the tax consequences of selling if you didn't hold the fund in a tax-advantaged account.)

Yes, those numbers are strictly theoretical: No one actually owns the average U.S. diversified fund. Let's look at some specifics. Investors often jump first from funds hit hardest in a downturn. So what would have happened if you held onto those at the bottom of the charts? Take

(BSCFX) - Get Report

Baron Small Cap. An investment in that fund would have lost nearly half its value during the summer selloff in 1998. But it went on to gain more than 95% from the bottom in October to the end of last week.

(KOPPX)

Kopp Emerging Growth was off 42% during the correction but rocketed some 131% since then. The gains in other cellar dwellers, though not as dramatic, are compelling as well.

Of course, swings like that spell volatility. And you don't hold on to your portfolio no matter what. A selloff can be an excuse to sell off. Go ahead and sell if you once thought you understood what risk meant and how much you could handle -- until you just discovered your fund can go down as fast as it went up.

Or, if you like the long-term prospects for a hard-hit sector such as the Internet but can't take the stomach-churning drops, go to a more diversified fund with a manager who can take a big stake but knows how to ease in and out when appropriate.

And if you think this will be a long-lived bear market, then shift into something you think is safer, such as money-market funds. But this comes awfully close to market-timing in my book.

I know, times like these can be scary -- even when you have some rallies sprinkled in, like we did Wednesday. But remember, even though the average mutual fund is under water since the

Nasdaq's

high this year, it still shows gains for the year.

In any case, that's not the relevant time period for you. The only return that really matters is the one measured from the day you bought a fund to the day you sold it. Unless you got into the market at the beginning of this correction, pay more attention to your portfolio's progress since you first started investing. For daytraders or for hedge-fund owners trying to eke out gains by catching discrepancies on an hourly basis, a downturn like this hurts. But your bottom line doesn't depend on tomorrow's trade; you can weather short-term nonrealized losses if you have a long time horizon. And if not, if you're investing money you need sometime in the next few years, why are you in the market in the first place?

I've said it before: It's time, not timing, that will matter most to us small shareholders.

Boring, basic advice, you say? It surely isn't fashionable. In fact, it's tough being a long-term investor in the era of the daytrader.

But you'll still make money if you are.

Which isn't dull at all, is it?

Brenda Buttner's column, Under the Hood, appears Thursdays. At time of publication, Buttner held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at

TSCBrenda@aol.com.

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