"We don't see things as they are; we see things as we are."
-The Talmud

When you say a colleague "can't see the forest for the trees," you're saying that he's so detailed oriented, present minded, and narrow in his perspective that he can't see the true, broader significance of his work. He might be gifted in his analysis but he can't see the complete use of his research and, unfortunately, he can't use that larger focus to inform his detailed evaluations.

Could it be that you, too, sometimes fall into that same trap? Is it possible that you also get carried away with the specifics of an issue and lose sight of the more significant importance it holds? Do you sometimes focus on current economic events so closely that you can't see how they fit into a series of business cycles and then benefit from that insight?

It's incredibly easy for you as an investor to become so spooked by market volatility and bad economic news that you just can't continue to make smart investment decisions for the long run. You can't tolerate any more of the immediate stresses and strains, and you want to flee to some sort of a safe place—a refuge where you can park your money until markets "return to normal."

Streaming media coverage—television, radio, and the Web—focus on what the stock and bond markets are doing minute by minute. The problem with getting financial information in real time is that you feel you ought to be able to see it, understand it, and learn from it. Along with the talking heads on television, you have scrolling data, flashing alerts, and several sound bites from "experts," each with a slightly different take on the meaning of what's happening and their own predictions.

In reality, the unfolding events rarely tell you anything close to their full importance until you can see them calmly, dispassionately, and in a broader historical context. Let's take a look at a single 20-year time period and focus on it from different points of view to see how this works.

Quarter-by-quarter returns

Between Dec. 31, 1991, and Dec. 31, 2011, the Standard & Poor's 500 Index turned in quarterly returns that were as strong as more than 21 percent at one time and as weak as almost minus-22 percent at another. In between those highs and lows for those three-month periods were more gains and losses, and they were interspersed so that rarely did you find a long and consistent run of good news.

Here are a few quarterly returns leading up to and following a period of the strongest returns: Q2 1998, 3.3 percent; Q3 1998, minus 9.9 percent; Q4 1998, 21.3 percent; Q1 1999, 5 percent; and Q2 1999, 7.1 percent.

Looking over those quarterly returns between March 1998 and June 1999 as they developed in real time, you might not have liked the loss of nearly 10 percent in the third quarter of 1998, but you probably could have accepted it and stayed in the market and thereby enjoyed more positive returns through June 1999.

Here are some quarterly returns around the weakest return of -21.95 percent, which was for the quarter ending Dec. 31, 2008: Q2 2008, minus 2.7 percent; Q3 2008, minus 8.4 percent; Q1 2009, minus 11 percent; and Q2 2009, 15.9 percent.

While you were actually living through this time period, you remember that many thought the financial world was coming to an end. These quarterly returns seemed like an unfolding catastrophe from which there was no recovery in sight and there never would be. Consequently, it's unlikely that you were still invested in stocks to the same degree in the second quarter of 2009, and that you realized fully the almost 16 percent rise. When you focus on back-to-back negative quarterly numbers like these, you become so disenchanted with investing that you just want to give up.

Year-by-year account balances

If we look at the same 20-year time period and focus on the cumulative returns that added up year by year, the pattern is a little more encouraging except for several reversals in which previous gains were lost.

Let's assume again that you invested $100,000 on Dec. 31, 1991, and left all the dividends to compound. By the end of 1999, your account balance would have reached $421,048. Through the dot-com bust of 2000-2002, however, your losses would have left you with a reduced balance of $262,761.

So your $100,000 would have grown to $421,048 in just eight years. During the next seven years, that balance would have dropped and then recovered, growing to $455,303. Watching all that initial positive growth would have been exciting but watching the declines would have been depressing. Even when you saw significant gains that brought you back to and beyond your past highest balance, you might have said, "I'm only just playing catch-up!"

Here are some of those year-end balances from the original hypothetical $100,000 investment made in Dec. 31, 1991, following by the annualized rate of return: one year, $107,608 (7.6 percent); five years, $202,887 (15.2 percent); eight years, $421,048 (19.7 percent); 10 years, $337,272 (12.9 percent); 11 years, $262,761 (9.2 percent); 15 years, $455,304 (10.6 percent); and 20 years, $449, 674 (7.8 percent).

The long-term view

When you think of stock market performance represented by the S&P 500 Index year by year, you might become enthusiastic about strong years and discouraged by weak ones. Keep in mind that variability in stock market returns really is normal. It just comes with the territory. You might not like it, but that's just the way stock prices fluctuate. Overall, stock market returns for longer periods are good compared with investment in the so-called "safer" investments like Treasury bills and certificates of deposit.

In terrible times like our current recession, you want the "safety" of cash in a fixed-income account no matter how low the return. You just don't want to see any more losses. But don't be stampeded into believing that what you think of as safety will give you any long-term financial security. You have to ask yourself, "Will the short-term safety of cash accounts give me the long-term security of a balanced portfolio of stocks and bonds?" No.

Let's imagine that you and a colleague both invested $100,000 on Dec. 31, 1991. Your colleague put his money into cash and you put yours into a mix of 60 percent stocks and 40 percent bonds. By the end of 2011, your account balance would be $410,809 and your friend's would be $184,802. Your return overall came in at more than 7 percent and your colleague's at just over 3 percent.

It's difficult for even the most seasoned investor to muster the conviction to stick with a balanced portfolio for the long run when faced with all the daunting problems and volatility that face our markets. It's important to remember, however, that time is the important factor but that timing isn't. Don't attempt to peg the best time to shift between investments. Follow a more prudent and a more intelligent investment plan by diversifying and then by remaining true to that well-reasoned plan.