The average investor in equity mutual funds earned 5.32% over the 17 year period from 1984 through 2000, while the S&P 500 Index returned 16.29%. The big difference is due to poor investor attempts at timing the market. Selling when returns are negative and then buying back when the markets are showing positive returns hurts performance in two ways. First, the investor is, by definition, buying high and selling low - a recipe for poor performance - and second, the investor is likely to not repurchase an investment until there are sufficient positive returns to confirm that the markets truly are on the upswing. It is this interval (the waiting period) where much of the positive returns can and should be captured.

The biggest risk investors face stems from their own behavior and this of course is related to a general discomfort with market volatility. There is a fear that when markets go down, they will continue to go down forever. (On the other end of the spectrum, when markets are on the rise investors assume it is a trend that will continue indefinitely, resulting in overexposure to "hot" stocks.)

Those who have invested successfully over the long-term understand something that eludes others: volatility is a good thing. Without it, all equities would return a tame 5%-6% bond-like average over the long-term. Volatility - the risk that investment might have a loss - results in a "risk premium" for equities. This premium is the increased return investors demand for taking on the possibility of loss. Thus the reason to invest in equities is to take advantage of the reward offered for assuming some risk of loss.

The ideal is to take on a measurable degree of risk, but only an amount that one is comfortable assuming. Savvy investors expect their investments will go down in value at times, but they have experience and know that maintaining one's well designed portfolio through the best and the worst is the smartest way - the only way - to meet financial goals. Such investors ignore their emotions (and don't listen to all the media noise as well) and actually welcome the volatility that ultimately rewards.