Young investors' chance
TERRY SAVAGE firstname.lastname@example.org Aug 3, 2009
For those likely to be discouraged after seeing their dollars go down the investment drain in their 40l(k) plans: don't give up. This is the perfect moment to "rev up" your investment decisions.
Updated: May 3, 2013 12:15PM
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.
And what will you be telling yourself about today's market a year from now -- in hindsight?
That doesn't really matter because you can't make money in hindsight. And despite all the investment gurus' forecasts and pronouncements, no one has perfect foresight, either.
What you can have is perspective. And a persistent, educated belief in the future. And the discipline to create an investment plan and stick with it. That has always been the basis of my approach to investing, and my approach to writing about the stock market. But now there's another study that validates that strategy.
T. Rowe Price has just released a study headlined: "Can Bear Markets Be a Silver Lining for Young Investors?" The premise is simple and surprisingly obvious. The message is directed to young investors -- and those young people who are now afraid to become investors:
"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 might be surprised to learn that, in the past, such downturns have presented new investors with rare opportunities to benefit from healthy future returns."
Time is money
This is a lesson designed for those just starting their careers, who are likely to be discouraged after seeing their hard-earned dollars go down the investment drain in their 40l(k) plans. But instead of giving up, this is the perfect moment to "rev up" your investment decisions.
The T. Rowe Price study shows that those who start investing during a severe bear market gain a substantial advantage by investing regularly over those decades until retirement. That's because they have two powerful forces in their favor: the cyclical nature of markets and the ability to accumulate more shares earlier in their investing career. If you have the discipline to maintain a program of regular investing, even as the market remains discouraging, you will reap greater rewards over the long run. Here's the historical proof:
The study compares the results of four investors who each contributed $500 a month (15 percent of a $40,000 annual salary) to a retirement account invested in the S&P 500 index regularly over a 30-year period.
The T. Rowe Price study used a hypothetical $10 share price at the beginning of each period, and it was indexed to follow the actual monthly fluctuations of the S&P 500. All dividends were reinvested in additional shares.
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 surprising result: 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!
Bear at the beginning
Then, as now, it was discouraging to keep investing monthly in a market that showed poor returns. The S&P 500 had a negative 0.9 percent return from 1929 to 1938, and only a 5.9 percent return in the stagflation of the 1970s, as these investors were starting out.
Yet the bear market investors stuck to their plan -- and that provided a huge benefit.
At the end of 30 years, the portfolios of those who started out in the bear markets were worth more than twice the value of the two investors who started out in bull markets.
All those years of buying shares at low prices put them in a better position to gain from future bull markets, after the initial bear market.
Are you thinking that's ancient history? Well, let's project the retirement portfolio results for today's investor, taking a starting date of 1999 and continued regular investments through 2008.
Suppose today's investor never makes any more investments but simply maintains her account for the remaining 20 years.
We'll project that she earns only the same, relatively low 8.5 percent annualized return that was realized between 1929 and 1958, a very subpar period in stock market history.
Even so, at the end of 30 years, her account will have gained a 1,208 percent return on her contributions!
Christine Fahlund, senior financial planner with T. Rowe Price, notes: "A poor start doesn't necessarily equate to a smaller nest egg. History, indeed, demonstrates just the opposite -- assuming they maintain their investment program."
This might be small consolation to those nearing retirement -- worrying about the risk of losing more vs. the risk of not having enough money to be able to retire at all. But it's worth passing on to those just starting out. As the old saying goes, it's not market timing, but time in the markets, that wins in the long run. And that's The Savage Truth.