Stocks a good bet if you keep pluggin' away

Thursday, Oct. 29
Posted 2 p.m. Eastern

Boomers -- have you changed your investment strategy in light of the financial crisis? A recent MetLife survey indicates a shift has taken place.

Respondents were asked to what degree the events of the past year influenced the way they save or plan for retirement. Four out of 10 older boomers (ages 55-65) said it had a strong or very strong influence, compared to about a third of younger boomers (ages 46-54). The financial crisis had a lesser impact on younger generations.

How did their retirement investments change as a result of the crisis? Some 29 percent of older boomers say they are more disciplined (versus 18 percent of younger boomers) and 28 percent say they are more conservative (versus 16 percent of younger boomers).

It's as good a time as any to take a hard look at how much exposure you have to the stock market versus bonds and cash. If you're an older boomer, you have less time to recoup big losses, so you may want to adjust your asset allocation. If you're a younger boomer, you too might want to make some adjustments.

Anniversary of the Great Crash

After all, anything can happen. Let's go back eight decades and consider the Great Crash of 1929, which foreshadowed the Great Depression. Guess what? The events of that year weren't that much different from what we recently experienced. In the Wall Street Journal, Richard Sylla, Henry Kaufman Professor of the History of Financial Institutions and Markets at New York University, says it was more like a "break in the market," quoting a New York Times article from that era.

In the three weeks that began Oct. 24, 1929, the Dow Jones Industrial Average fell 35 percent. Then over the following five months, it shot up 48 percent, erasing most of the losses of that market correction.

That sounds eerily familiar. Let's recap the events of the last year: Between Sept. 12, 2008 and March 9, 2009, the Dow lost 44 percent. Since then it's up about 50 percent, Sylla points out.

So what happens next?

Looking backwards, make no mistake about it: Eight decades ago there was a loud and nasty crash, but it took place over the course of three years. From peak to trough the Dow Jones Industrial Average plummeted 89 percent between 1929 and 1932. And it took 22 years, until 1954, for it to fully recover its losses.

Can that happen again? Can you stomach a painful 89 percent loss in your retirement portfolio? Not that you should expect this to happen. It likely won't. But what if it does?

Stick with stocks

Well, don't cut out of the market altogether. Last March, as investors were reeling from the market maelstrom, an article by Brett Arends in the Wall Street Journal sent out a ray of hope. He examined what would have happened if investors continued to invest regularly through the Great Depression and beyond. Known as dollar cost averaging, the practice involves plunking a regular sum in the market each and every month, regardless of conditions.

What would have happened if someone invested $100 a month in a portfolio of the top 500 companies (similar to today's S&P 500, but before it came into existence) for 30 years beginning September 1929? This "back-tested" portfolio was assembled with the help of Ibbotson Associates. An investor's total outlay over that time period would have been $36,000 ($100 X 12 X 30).

Shocking revelation: The investment would have grown more than tenfold, to $411,000, including reinvested dividends.

Obviously (or not so obviously, if you're going through gut-wrenching market turmoil), it's a good idea to keep plugging away with your investment plan, and to keep some exposure to the stock market, regardless of what happens. This is particularly true for those who still have some time ahead before they retire.


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