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The crazy thing about an extended bull market is that it can make inexperienced investors think they are geniuses and those who didn't have any money at all invested feel like losers. Now that we're in the midst of a volatile bear market, it's almost as if a Great Equalizer has appeared reminding investors about the risks and rewards of long-term investing.

Dial back a couple of years and who can't think of friends or acquaintances who seemingly overnight turned into puffed-up barrel-chested financial wizards as their portfolios produced paper riches beyond their belief. But now that the tide has turned, those paper profits don't amount to as much even though buying opportunities abound for those whose eyes aren't clouded with emotions.

In investing, emotions are everybody's evil step mother in the investing arena. Getting caught up in a buying frenzy can be as financial dangerous to someone's long-term wealth plan as getting caught up in a selling one is. So if the market downturns of late have you glued to CNBC or looking at the changes in your fund's net asset values every day investing in the stock market might not be for you. The safe harbor of a good money market mutual fund could be a better choice. After all, money market mutual funds do make you money; in bull markets typically not as fast as some stock funds can, in bear markets typically much faster.

As for stocks. Even though the tech-mania of the late 1990s had lots of folks thinking that making money was like shooting fish in a barrel, it isn't. Having said that, the reason brokers are out us selling stock funds--- or folks selecting them on their own--- is because of a belief that corporate America is going to be profitable. Underpinning those beliefs are historic performance figures.

Over the past seven decades, for instance, stocks generally have outperformed bonds. For example, look at 56 overlapping 20-year time periods from 1926 through 2000, and there was only one period in which large-cap stocks underperformed government bonds according to Ibbotson Associates, a Chicago-based financial research company. That was from 1929 through 1948.

During the same 20-year time periods, small cap stocks have always outperformed long-term government bonds, Ibbotson's research shows.

That is, of course, the 20-year outlook. Shorten those rolling year periods from 20 years to 10, and investing in stocks gets riskier. As a result, there were seven time periods out of the 66 in which bonds outperformed large-cap stocks.

Even in five-year periods, the odds aren't so bad, based on historic performance. In rolling five-year time periods, there have been 15 time periods out of the 71 in which large-cap stocks have underperformed government bonds and 19 time periods in which small-cap stocks have underperformed.

Bottom line: Investing in the stock market, even via professionally managed mutual funds, is never risk-free."Even over 20-year rolling periods of time , there is always risk involved," says Peng Chen, a vice president at Ibbotson Associates.

As far as timing goes, if you weren't able to participate in the last past bull market, the recent market's fall could be handing you another opportunity. But understand that there are risks involved and that it takes time to make money. For mutual fund investors that typically means an investment time horizon of five if not 10 years or more. And, one of the best investment strategies for long-term fund investors under any market conditions, is dollar-cost averaging in which a fixed-dollar amount, like say $50, or $100, is invested on a regular basis.

And finally, investing best serves people when it's a goal-driven proposition. What that means is, whether you're investing for retirement, your kids' education's, a second home, to acquire x amount of money or whatever, once you've meet that dollar goal, take the money and use it as intended. Or, move it into another kind of investment to protect your profits. Then, if you like, pick another goal and start investing again.

There has always been volatility in the stock market, however, the numbers show that the longer the holding period the less volatile the market; and the shorter the holding period the more volatile the market. Here's a look at how stocks have outperformed bonds over 10-year rolling time periods between 1926 and year-end 2000:

  • 10 years/Large Cap Stocks
    There have been seven 10-year rolling time periods in which large-cap stocks have underperformed long-term government bonds. They were:1928-1937, 1929-1938, 1930-1939, 1931-1940, 1965-1974, 1968-1977 and 1969-1978
  • 10/years/Small Cap Stocks
    There have been 11, 10-year rolling time periods in which small-cap stocks have underperformed long-term government bonds. They were:1926-1935, 1928-1937, 1929-1938, 1930-1939, 1969-1978, 1981-1990, 1982-1991, 1983-1992, 1984-1993, 1985-1994 and1 986-1995.

(Source: Ibbotson Associates)

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