Tengler: Don't let volatility change investment strategy

Volatile markets separate the investors from the traders.

Volatility, like big wave surfing, creates opportunities for those with the courage, skill and patience to select the right wave and ride it to shore.

In January, Barron's notes, the average daily swing in the S&P 500 was 19 points or about 1 percent — almost double the average swing of 10 points in 2014.

Maintaining discipline is no doubt tough for all of us.

But not as difficult, I think, as it is for Wall Street. During the early 1990s, Wall Street shunned value stocks after a difficult few years of underperformance.

One of the major business news magazines published a cover story declaring value investing dead. The big capitulation. The last pile-on. And that is how a market bottom is achieved, when almost everyone has given up and there is no one left to disappoint.

From that point value stocks (which had already turned the corner) began a multi-year period of significant outperformance. Investors would be would be wise to remember what Gen. George S. Patton, Jr. said: "If everybody is thinking alike, then somebody isn't thinking."

The way to make money in the market is not by thinking like everyone else. We make money by thinking like long-term investors. Financial research firm Dalbar has examined 20 years of individual investor mutual fund inflows and outflows and found that the average individual gave up 1.8 percent of their annual total return due to poor timing.

Over the entire period the cost of moving in and out of mutual funds (as opposed to buying and holding) was 42.6 percent. Nearly half of a mutual fund's total return. Trying to time the market is tempting during periods like the early weeks of 2015. When the markets appear irrational we lose our bearings. And we often run for the exits —exactly the time we should stand fast.

Of course, there is plenty to worry about: the strong dollar and its impact on U.S. corporate earnings, terrorism, a slowing China, the rapid decline in the price of oil.

But then, there are always worries. Bull markets climb a proverbial wall of worry. Risk is inherent to investing. The trick is to balance the risk against the long-term opportunity. Value stocks in the early 1990s were universally disliked. And then they took off. Years of stellar performance. Group think, as we tell our young, can be dangerous.

The strategy is easy really. Buy the stocks of great companies you've identified when the crowd is looking in the other direction. Then stick with them over the long-term to enhance your total return. To paraphrase Patton: Running with the herd may just get you trampled.

Nancy Tengler spent two decades as a professional investor. She is an author, financial-news commentator and university professor. Reach her at nancy.tengler@cox.net.