Sinking feeling? Use past as guide
Investors who lost close to half their money in the stock market between 2000 and 2002 are still scarred by the experience.
Many vowed then not to hesitate ever again, but to move quickly out of their stocks and stock funds at the first sign of trouble. Recently, the market has been sending mixed signals.
Analysts still do not know where the housing recession will take the economy or what effect problems in the mortgage industry will have on consumer and business lending.
With the outlook murky, you might find assurance about the future of your investments by looking back at one of the worst stock market periods of all time — the March 2000 to October 2002 drop of 49 percent in the benchmark Standard & Poor’s 500 index.
Let’s start with the most painful circumstance — the person who put all his money into the stock market amid the euphoric days of the late 1990s rally, and then was paralyzed as the stock market turned down in March 2000. Say the person invested $10,000 just before the market started plunging, then opted to give up during the grim days of October 2002.
He could have decided then to flee to safety and put all the money into CDs and a savings account. Perhaps he would have earned about 5 percent a year on the investments. But now, after about five years of safekeeping, the investor would have only about $8,140.
It would have been better if he had been able to grit his teeth and last out the market, which is easy to say with hindsight.
Comparison
But had the investor held on, more than seven years after making a $10,000 investment in the stock market through the Vanguard 500 stock market index fund, he would now have about $11,940.
That’s not a great outcome after seven years, but it beats the loss the investor took when he panicked well into the downturn.
But consider three other investors who did what good investors are supposed to do: They bought a broad mixture of stocks — large and small U.S. companies plus international businesses — and also bonds. Then they held on even though they lost money between March 2000 and October 2002.
Whether they had been aggressive or fairly conservative, they would have come out of the turmoil in better shape than either the investor who panicked during the downturn, or the person who invested 100 percent in stocks at the market’s peak and held on.
To give you a simple glimpse at the diversified investor who blends different amounts of stocks and bonds, I looked at three Vanguard funds geared toward specific types of investors: the LifeStrategy Growth fund geared toward aggressive investors, or people willing to take substantial risks on stocks; the LifeStrategy Moderate Growth fund geared toward people who will take moderate risks with stocks; and the LifeStrategy Conservative Growth fund, aimed at fairly conservative investors.
Looking at history
Typically, investors are told to be fairly aggressive — or to hold a lot of stocks in mutual funds — when young so they can make the most money possible on their investments over 30 or 40 years. Long periods of history show that is a valid strategy. During the last 80 years, the stock market has climbed about 10.4 percent a year on average and bonds have gained about 5.4 percent. Yet during the last seven years, the aggressive investor — the one who put 85 percent of his money in stocks and 15 percent in bonds — did not do as well as the fairly conservative investor.
The aggressive investor, who
invested $10,000 in LifeStrategy Growth in 2000 just before the market started to plunge, has about $13,800 now. The investor who held some stocks throughout the market tumult but also had 55 percent of the money in bonds ended up the best. That investor, in the LifeStrategy Conservative Growth fund, would now have about $14,700.
The person who adopted the strategy of investing about 65 percent of his money in stocks and 35 percent in bonds through the Life-Strategy Moderate Growth fund would have about $14,400 now.
If you have a 401(k) plan and aren’t sure what to do, you can copy the mixture in the LifeStrategy fund that matches your appetite for taking risks.
XGail MarksJarvis is a personal finance columnist for the Chicago Tribune. Contact her at gmarksjarvis@tribune.com.