Past performance does not guarantee future results.

If only hindsight could equal foresight, many investors would have selected just the right investments, sold them at profits, bought others that were undervalued and be far more than just a bit wealthier than they were four or five years ago.

I am, of course, referring to the gains made in most of the major capital market indexes this year as compared to the last three years. How many investors finally sold out of all large cap holdings (market cap = number of shares outstanding times market value of shares) at the end of 2002, only to watch the benchmarks of this entire sector take off this year? Regrets, should haves, abound.

Benchmarks are not a large scratches on your work bench. Why be interested in indexes, or benchmarks as they are often called? Benchmarks are composed of different classes of equities and bonds, hundreds of them similarly bundled together if you will, weighted by market capitalization, then tracked and monitored in performance by very reliable companies with a reputation for excellence, i.e. Standard & Poors, Russell Management.

Large cap equities - One of the most commonly known indexes, the S&P 500 covers 500 stocks of industrial, utility, transportation, and financial companies of the US markets (mostly NYSE issues). These companies are mega-giants all.

Global securities - MSCI EAFE Index = Morgan Stanley Capital International's market capitalization weighted index composed of companies representative of the market structure of 20 developed market countries in Europe, Australasia and the Far East, such as. Australia, Hong Kong, Norway, Austria, Ireland, Singapore, Belgium, Italy, Spain, Denmark, Japan, Sweden, Finland, Malaysia, Switzerland, France, Netherlands, United Kingdom, Germany, New Zealand.

Bonds - Lehman Brothers Aggregate Bond Index is composed of securities from Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index, and the Asset-Backed Securities Index.

Small cap equities - Russell 2000 Index measures the performance of the 2,000 smallest companies, companies whose total market capitalisation ranges from $1.3 billion down to $128 million.

Benchmarks are used the world over to compare performance of various investments, including your pension fund choices. The phrase most often coined when reviewing performance is "how well have your investments stacked up relative to the appropriate benchmark?" Often, the answer is "exactly who cares about the benchmark, when it does not take a rocket scientist to see that, benchmark or not, I lost - on paper - a lot of my pension over the last few years (time).'

Two key items here - gains / losses on paper - and - time play a large role in investor expectations, often totally unrelated to reality of analysis. Last week we set up a mutual fund criteria rating list so that you can compare your mutual fund selections against their benchmark and against their like-kind peer groups. The objective was to demonstrate that your choice of what may have been excellent large cap mutual funds, for example, simply came up against the worst three-year consecutive decline since 1929-32. That's a long time. What are the odds of that happening again soon? We don't know.

And the Last Shall Be First. Money managers do know that to minimise the risk of the single asset class portfolio taking large losses, one should diversify asset holdings and allocate assets between classes. Remember that risk tolerance questionnaire that you were asked to answer several years ago? There was a reason for that, besides just looking at neat coloured pie shapes. Markets are totally capricious in nature - see The Value of Diversification Chart by http://www.russell.com/us. What may be the top performing class in one or two years, may be the bottom feeder the next. Multi-asset portfolios historically have returned better results than single asset classes.

If asked questions such as, "If equity markets lost more than 20%, two years in a row, what would you do? A) Buy more investments in beaten down value stocks; b) Sell out now, fearing more losses later; c) Do nothing, understanding that the market will eventually recover." How many of you originally chose c), do nothing, only to reverse your decision later?"

It is incredibly hard, isn't it to look at losses month after month? If you had held on, your portfolio (if it was composed of excellent mutual funds to start with) may just be approaching break even and poised to take advantage of new highs in these previously beaten down sectors.

Time and estimated performance comparisons. Ten years 1993-2003 year to date. If we look back at historical performance (because we don't have anything else to compare to) in spite of the three year bear market we see some very reasonable results. That is if you had invested $10,000 in large caps in 1993, your return investment would have more than doubled in value; yet, holding the position for the last four years, will still leave you in negative territory. The same example is true for almost every other asset class, small cap, international equities - over time, they have returned better than inflation and very respectable positive numbers. What is the end point here, mutual funds need to be held for the long-term. Your portfolio also needs to be rebalanced in order to take maximum advantage of the investment adage, "sell at the high and buy at the low."

It is a Test of faith and those to closer to retirement emotionally have found it much more difficult to believe. The Index Chart says it all. To those who have become an Experts on Timing the Market, moving everything out of bonds into other classes, wait a bit. You could be caught out again.

And as for investor expectations…………so will the Dow hit 10,000 before the end of the year. Is this market truly back?

Be wise with your money.

Next week, why do you need to rebalance your asset classes?

Martha Harris Myron CPA CFP is a Bermudian, a Certified Financial Planner(US license) practitioner and VP, Private Client Services at Bank of Bermuda. She holds a NASD Series 7 license, and formerly owned a US financial services practice meeting the needs of 400 individual and corporate clients.

Confidential Email can be directed to marthamyronnorthrock.bm

The article expresses the opinion of the author alone, and not necessarily that of Bank of Bermuda. Under no circumstances is this advice to be taken as a recommendation to buy or sell investment products or as a promotion for financial plans. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.