You're Not the Only One With Bad Timing

If you feel like you've had some lousy timing with your investing lately, you're not alone.

Bear markets always wreak havoc on investor confidence, and this one has done more damage than most. With a broad-based decline that has left few places for investors to hide, the year-old market downturn doesn't have any obvious end in sight. An economy that's projected to contract at a pace not seen in over 25 years has everyone on edge.

More than anything else, though, down markets make you beat yourself up for the mistakes you made. Maybe you bought some high-flying stock right at its peak, after it had produced stellar returns for months or years before -- only to come plummeting back to earth after you became a shareholder. Or perhaps you bought shares of a stock that looked like a great value after a substantial decline, only to see it fall even further.

It won't earn you back your losses, but take some heart in the fact that even the most well-respected institutions make similar errors. Consider the venerable Dow Jones Industrial Average and the terrible timing in the replacements it has made lately.

The great Dow
Despite its narrow scope, the Dow Jones Industrial Average is still seen as the primary popular benchmark of stocks. Talk to someone about Dow 5,000 or Dow 35,000, and they'll generally know what you're talking about. Try mentioning levels on some other index, like maybe 500 or 2,500 for the S&P 500 index, and see how many blank stares you get.

While Dow Jones has historically not made numerous changes to the list of companies in the Dow, it has done so on several occasions during the last 10 years. In 1999, the Dow added Microsoft (Nasdaq: MSFT  ) , Intel (Nasdaq: INTC  ) , the old SBC Communications, and Home Depot (NYSE: HD  ) , replacing old-economy stocks Chevron (NYSE: CVX  ) , Sears (before it emerged from bankruptcy), Union Carbide, and Goodyear Tire.

Then in 2004, International Paper (NYSE: IP  ) , Eastman Kodak, and AT&T (before its acquisition by SBC) were replaced by Pfizer (NYSE: PFE  ) , Verizon (NYSE: VZ  ) , and AIG.

You might think that the Dow changes would be designed to benefit the average. But many of the new Dow stocks subsequently performed worse than the overall market did. Take a look below:

Stocks Added to Dow

Subsequent 5-Year Return*

Intel

(40%)

Microsoft

(38.5%)

Home Depot

(16.8%)

Pfizer

(46.7%)

Verizon

7.8%

AIG**

(98.3%)

* Returns for Nov. 1, 1999 to Nov. 1, 2004 for stocks added in 1999; April 8, 2004 to Jan. 26, 2009 for stocks added in 2004.
** AIG has been dropped from the Dow as of Sep. 22, 2008, but returns calculated through Jan. 26, 2009.

The returns for the first three compare to a 10.6% loss on an S&P 500 index fund, and a 20.1% loss since the 2004 stocks were added.

More unfortunate timing
Of course, many of the stocks that were removed from the Dow did pretty badly, too. Goodyear and IP both lost 70% in the five years after they were taken out of the index. But Chevron did well after its removal.

Moreover, in 2008, the Dow had horrendous timing in adding Bank of America to the average. B of A has since lost about 85% of its value.

Everyone makes mistakes
To be fair, the purpose of the Dow isn't to pick stocks that will perform the best. Rather, it tries to pick companies that fairly represent the broad economy.

But even so, there are a couple lessons you can take from the Dow experience:

  • Don't chase performance. The Dow didn't add Microsoft and Intel until nearly the end of the tech boom. If it had added those stocks years before, it would have benefited far more from their rise. Many investors make the same mistake, only adding a stock to their portfolio after it's gone up substantially.
  • Accept that you're not perfect. It's going to happen -- you'll pick some losers. While trying to avoid losing stocks is important, it's much more essential that you learn to deal with losers when you have to.

So if you're feeling like you're a lousy investor just because you've lost money in the bear market, don't. Keep your confidence up and stick with it, and your investing will pay off in the long run.

More Foolishness to help you make the most of your investing:

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Fool contributor Dan Caplinger has made plenty of mistakes. He doesn't own shares of the companies mentioned. International Paper is a current Motley Fool Income Investor recommendation, while Bank of America is a former one. Pfizer, Microsoft, Intel, and Home Depot are Motley Fool Inside Value selections. The Fool owns shares of Pfizer and Intel. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy won't blow it.


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