Now's When You'll Make the Most Money

You always want to earn the best returns you can. But while many people look to speed past the hottest performers at the peak of bull markets, aiming instead to limit your losses when the bear growls can contribute more to long-term market-beating results.

As hard as it may be to remember, just a couple of years ago, many investors had just about forgotten that stocks could lose value. Any investments that hadn't produced double-digit returns from the 2002 lows were being written off as chronic underperforming wealth-destroyers. Only by aggressively seeking out the biggest gains possible could a stock or fund get investors' attention.

But after suffering through the worst bear market in generations, investors have a brand-new perspective on what makes a great investment. Moreover, many stocks and funds that languished outside the market spotlight from 2003 to 2007 have come into their own over the past two years.

A fund example
Take, for instance, the Yacktman Fund (YACKX). If you had looked at this fund back in early 2007, you probably would have dismissed it as a hopeless case. After all, its returns fell in the bottom quarter of all large-cap value funds during each of the three years from 2004 to 2006. And it even managed to lose money during 2005 -- while the S&P 500 gained nearly 5%.

It would have been easy to forget just how well the fund did during the tech bust. In 2002, the fund didn't just avoid the big losses in the broader market; it posted double-digit gains, beating its benchmarks by 30 percentage points.

Moreover, many investors likely believed that the fund's overall strategy was completely outdated. In its 2006 annual report, the fund's management touted its long-term holdings in Coca-Cola (NYSE: KO  ) and Kraft Foods (NYSE: KFT  ) , and was happy about new acquisitions like Microsoft (Nasdaq: MSFT  ) , Home Depot (NYSE: HD  ) , and PepsiCo (NYSE: PEP  ) -- hardly the big-growth stocks that many investors seemed to prefer during the bull market.

Preserving capital
Yet when the market turned south, Yacktman Fund investors remembered why they had chosen the fund. In 2007, the fund returned to the top half of its peer group, eking out a small gain. And in 2008, Yacktman really shined, limiting its losses to just 26% -- a double-digit percentage-point advantage over other value funds and the S&P 500. Now, the fund sports a 10-year performance record that puts it squarely at the top of its class.

The fund didn't entirely dodge the bear-market bullet -- it had held shares of AIG (NYSE: AIG  ) and AmeriCredit (NYSE: ACF  ) , which took significant hits. But the same strong blue-chip defensive strategy that had made its returns look ugly in comparison with high-octane competitors during the bull market vaulted Yacktman into the stratosphere when those aggressive bets by other funds came crashing down.

What to remember
Unfortunately, many investors have short memories. It's easy to say that you'll never make the mistake of thinking a high-flying fund's returns justify its higher risk, given your experience from the past two years. Yet when the next bull market starts -- if it hasn't already -- those top performers will again try to tempt you away from the less compelling funds that did so well during the bear market.

To be a successful long-term investor, though, you need to get past the short-term crazes that seduce less disciplined shareholders into making decisions they'll later regret. Once you make the smart decision to buy a fund based on its overall long-term track record rather than how it has performed in the past year or two, you still have to avoid the pitfall of dumping it when it's out of favor. If you can do that, however, you'll be well on your way to financial independence.

For more on mutual fund investing:

Learn more about mutual funds and exchange-traded funds in our Motley Fool Champion Funds newsletter. A 30-day free trial is yours for the taking. Yacktman Fund is a Champion Funds recommendation.

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Fool contributor Dan Caplinger looks forward to the next bull market -- but he's holding on to his defensive investments. He doesn't own shares of the companies mentioned. Home Depot, Coca-Cola, and Microsoft are Motley Fool Inside Value recommendations. Kraft Foods, Coca-Cola, and PepsiCo are Income Investor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy wants you to succeed.


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