*Data as of March 31, 2004 Source: Morningstar in Software

Generating GS1 - 13 in Software *Data as of March 31, 2004 Source: Morningstar

Category Mid-cap growth Health care sector Mid-cap blend Small-cap growth Balanced Technology sector Large-cap blend Financial sector Small-cap value

10-Year Annualized Return 219% 210% 196% 188% 187% 186% 184% 183% 180%

this 10-year stretch, based on total returns, was a mid-cap stock fund, a healthcare fund, a small-cap stock fund, a technology-oriented portfolio, a couple of funds that focused on stocks in the nancial services sector, a blue-chip stock fund, and what s known as a balanced fund, which is a portfolio that invests in a mix of stocks and bonds It s all over the map (see Figure 4-1 on page 59) This is yet another reason why it s good to diversify your portfolio so that your odds of nding these hidden gems improve It also goes to prove that you can nd many paths to investment success, just as you can nd many ways to go broke

The single biggest challenge for new investors, then, is to nd a strategy that not only provides decent odds for success, but that suits their sensibilities If you have no stomach for risk and like the stability of knowing that you ll earn a set amount of dividend income every quarter, for instance, then placing your bets on risky start-ups in the volatile technology sector may not be your best move Not only do technology stocks rarely pay out dividends, their price can often uctuate violently Even if the tech stocks you end up picking do well, what are the odds that you d have the stomach to ride the ups and downs The next biggest hurdle: nding su cient fortitude to stick to a philosophy, even when things start to look bleak The history of investments is replete with good ideas that at some point or another ran into di culties At the turn of the twenty- rst century, for example, the housing market was booming as interest rates fell to lows not seen for decades But only a decade before that some real estate investors were scrambling to unload their properties amidst major downturns in the economies of big cities like New York and Los Angeles When it comes to stocks, pick any major success story and you ll nd periods of severe underperformance Microsoft used to be considered a can t miss stock But between 1998 and 2004 its stock went nowhere Well, sort of It went way up, and then way down, and then sputtered in between, in what s referred to as a trading range, meaning its share price seems stuck in a rut Dell Computer is widely regarded as one of the best run companies in the world But people often forget that in the early 1990s, when the computer industry was just getting going, Dell su ered through several missteps and its share price was beaten down as a result No investment strategy will work if investors give up midway into implementation It s akin to ipping a coin 100 times and seeing it come up heads

every time You know that at some point the laws of probability will kick in and your coin will come up tails, at least a few times But if you give up after the hundredth toss, you ll never see the laws of probability work their magic The same goes for investing

In addition to knowing who you are and having fortitude, there is a third big challenge that all of us face in the stock, bond, and real estate markets, though it s one that few people talk about often It involves not only being patient with your approach to investing, but consistent all the way through The process of investing is like writing a good novel Like good literature, a good investing plan has a solid beginning, middle, and end In investing, there are three distinct periods of owning any asset: buying it, holding it, and selling it No investment strategy can be deemed successful until the asset is eventually sold and the pro ts are booked To be sure, it may appear as if you re on the right track You may have built up hundreds of thousands of dollars in paper pro ts based on where your investment is trading at today But until you actually realize those gains by selling the security, it s all hypothetical That means it s just as important to be good at selling stocks as buying them Take a look at the primary reasons stock pickers sell stocks in Figure 4-2 When it comes to selling, it is still important to be true to your philosophy If the reason you bought a stock was because you considered it underpriced, then why sell it if you still think it s cheap Wasn t the whole point of buying it because eventually you think other investors will realize the company s potential If you wanted to be truly consistent with this philosophy, why not sell when you think the stock becomes overpriced

Fig 4-2 Primary Reasons Stock Pickers Sell Stock This study re ects the favored reasons for selling stocks among institutional money managers surveyed between 2000 and 2002

Fundamentals are deteriorating Stock is overvalued Stock has hit a preset target price Other stocks look more attractive Stock has fallen X%

46% 37% 14% 2% 1%

Source: Sell Discipline and Institutional Money Management, Journal of Portfolio Management, Spring 2004