I don't like to be the bearer of bad news, but if you lost -20% last year you now need a +25% gain to repair that loss. If you lost -40% you need a +66.7% gain to get back to where you were before. Many of you who are reading this may not have been following along at the time, however one of my earliest issues of this monthly column made the point that minimizing losses was critically important – providing a table that illustrated the percentage gains needed to repair losses (read here).

How much money might you have if you limited every loss at 7% and immediately sold any of your holdings that were already down by more than that small percentage? Imagine if you did not make any excuses for "core holdings" or long-term positions that were just "too good to sell." Imagine you took the painful losses automatically and without emotion. You didn't take it personally, and you didn't blame the analysts or suggest that anyone misled you about your investment's health - you just sold! Imagine you just did what the book says you need to do to be successful in achieving above average returns.

Rather than imagining you did it, take some time to actually compute the results you could have had. We might call this the "opportunity cost", because you had an opportunity to do something different. Goofy moves by the Fed or Treasury Secretary had no bearing either, as they did not hold a gun to your head or make a law against moving your cash to a safer place.

"It will eventually come back", you might say, thinking your patience will be rewarded if you survive the current Bear Market and stay blindly loyal to the mutual funds that may have dealt you painful losses. And, over time, they very well could repair their losses. But can you afford to wait long enough for that to happen?

Investors stand the best chances of making up the damage by adhering strictly to the investment system’s rules. No mutual fund I have seen follows the rules as well as disciplined individual investors might do on their own. Not following the rules strictly enough created big losses, right? In a better market environment, why might we still be skeptical of mutual funds? Just consider these quotes taken from the Certification Level IV workbook provided to me back in May of 2005 (pg. 194):

• "Concentration is the key, not diversification; we put all our eggs in just a few baskets and watch them carefully while having rules to protect us."
• "It's only risky if you don’t follow the rules."
• "Key to your success: How many stocks do you own?"
• "Don’t own more than 8; Greatness is not achieved with a 20-stock portfolio.  More aggressive portfolio managers invest in only 6. During a bull market, this number can decrease."

Diversification works to the disadvantage of investors who are looking for ways to grow their portfolios many-fold in just a few years. While a mutual fund that diversifies into 50 or 100 stocks in a bullish market might be more concentrated than most of its peers, but it is still “over-diversified” with respect to the investment system’s rules. That makes it likely to get results that are largely in line with the performance of the major averages. Truly stellar gains are not to be expected by any mutual fund.

I still hear those who argue that it is impossible to time the market.  They might suggest that it was just a lucky call that we eliminated all stocks and moved 100% to cash in actively managed portfolios (Listen to this minute and a half audio clip from a 7-11-08 interview where this fact was pointed out - click here.) Luck had nothing to do with it.  Opinions had nothing to do with it either.  This is a fact-based system that was proven long ago, and all we are doing is seeing it prove itself again.