Peter Lynch, the former manager of Fidelity's Magellan Fund, once said that he felt that over half of the share holders in his fund had lost money, based on when they had bought and sold Magellan. This is a fund that has averaged over 18% a year for the last ten years, and over 22% a year during its lifetime (since 1963)!

Martin Zweig, a well-known market analyst and investment manager, recently commissioned Morningstar, the mutual fund research organization, to track the cash flows in and out of the nation's leading growth funds.

But, the investors did much worse. They apparently didn't make any money at all, and instead lost 2.2% a year with the same group of growth funds.!

Both of these a findings point to the same conclusion: as a group, investors do a rather poor job of deciding when to buy or sell their mutual funds.

The 219 growth funds had averaged an annual compounded return of +12.5% for the five years ended June 1994.

Let's think about why this happens. A particular fund has a great year, makes its way onto everybody's "Top Performers" list, and attracts lots and lots of investors. It is not uncommon for a hot fund's assets to triple after a spectacular year. When the previously successful and inevitably turns less hot, or even cold, and starts to produce losses, the average investor tends to lose patience and sells.

The Great Investment Paradox, therefore, is this: the volatility of growth investments exceeds the comfort level of most individuals to such a degree that it causes them to lose money at what historically has been a winning game - investing in equity mutual funds.

Most investors require growth returns to meet their long-term financial objectives. Cd's at 6.5% won't do it. They currently consider equity mutual funds because equities have a historical record of providing much higher average returns.

Avoid most of the downside and participate in most of the upside.

Individuals mistrust the market, usually due to past experience Therefore, they wait to buy until the new investment has "proven itself" by rising in price. Thus, they often end up buying high and, when prices retreat more than 5 - 10% from their purchase price, they sell and take a loss. In truth, many investors effectively manage to lose at a winning game.

A controlled-risk, defensive investment style is the best solution for people who don't have much tolerance for financial pain. As far as we can tell, that includes over 90% of the population.

We are in that business. Our management style attempts to deliver a fundamental trade-off: avoid most of the downside and participate in most of the upside. Although there is a cost, both from our ongoing management fee and from the likelihood of missing a portion of the market's rallies, the mathematical advantage gained by the avoiding large losses can be very powerful over a period of years.