Bear Markets Offer Big Opportunities

08/03/2009 9:41 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

Isn’t hindsight wonderful? In hindsight, you would have bought stocks in March—after selling them in August 2007. In hindsight, you wouldn’t have panicked last winter and sold stocks when it looked like the financial world was headed over a cliff. That’s why they say hindsight is 20/20.

And what will you be telling yourself a year from now, when you look back at today’s market—in hindsight?

Well, don’t stress out over that, because you can’t make real money in hindsight. And despite all the investment gurus’ forecasts and pronouncements, no one has perfect foresight, either.

What you can have is perspective. That’s what helps you earn stock market profits in the long run:  perspective, and a persistent, educated belief in the future, along with the discipline to create an investment plan and stick with it. 

That’s always been the basis of my approach to investing, and my approach to writing about the stock market. No insult to market timers intended, but some of us just aren’t cut out for that kind of rapid-fire decision making under pressure. And now there’s another study that validates the strategy of disciplined, regular investing over the long run.

T. Rowe Price has just released a new study, headlined: “Bear Markets’ Silver Lining for Young Investors.” 

This won’t help if you’re just a few years from retirement. Then, you’ll probably need to keep more of your money in cash.

But it is intended for younger investors who might have been scared out of investing by the volatile decade we’ve just experienced.

The premise is simple and surprisingly obvious: “After the historically poor performance of equities in the last decade—marked by two ferocious bear markets with overall losses greater than any other time since the Great Depression—some young investors might want to limit or eliminate their exposure to stocks. However, they may be surprised to learn that, in the past, such downturns have presented new investors with rare opportunities to benefit from healthy future returns.”

The study compares four hypothetical investors who each contributed $500 per month (15% of a $40,000 annual salary) to a retirement account invested in the Standard & Poor’s 500 index regularly over a 30-year period.

Two of those investors started out just before two of the worst bear markets in history—1929 and 1970. The others started in 1950 and 1979–just before two great bull markets.

The result: It’s really not that surprising, when you think about it…The ending account balances of the two investors who started in bear markets were more than double those of the two investors who began contributing at the start of decades with strong bull markets!

All those years of buying shares at low prices put them in a better position to gain from future bull markets, after going through the pain of the initial bear market. A bear at the beginning ends up winning—from that consistent plan of regular investing, even during the worst of times.

Sure, in hindsight, you could beat that record. But once again, you can’t invest using hindsight. And a plan of regular investments sure beats not investing at all.

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