Bear markets reward investors who have faith, keep buying stock

5/8/2007

It was looking dark for investors in October, 2002, when the Standard & Poor's 500-stock average fell to 776.76 - about half of its all-time high of 1,527.46, set in March, 2000.

The bear market had investors down and almost out. Many had lost half of their portfolio value.

But in recent days things have been much rosier for investors, and the S&P 500 is within 1 percent or so of its peak of seven years ago.

(The Dow Jones industrial average has been in record territory for weeks.)

So those who kept their investments pretty much got back what they lost on paper? Yes, but those who kept investing may have gotten back much more - a premium for their faith.

"A market decline can be the long-term investor's best friend because it allows buying at lower prices," Alan Skrainka, chief market strategist for the St. Louis brokerage firm Edward Jones, said yesterday.

"Market declines are normal, frequent, and not a good reason to sell good investments."

Peter Ruma, a Sylvania Township financial planner, said bear markets "are part of the grand scheme of things" and can help investors "weed out" the weakest stocks in their portfolios.

The tech bubble eliminated many stocks that were all paper and no substance, he said.

Here's a scenario to illustrate how a downturn can improve results long range.

Let's say an investor started putting money into Spider -

putting money into Spider -

a stock that mirrors the S&P 500 performance - at regular intervals, perhaps $1,000 a month, or $3,000 a quarter, at the peak in early 2000.

For a few months, the price of Spider shares (SPY on the American Stock Exchange) stayed at $140 to $150, but by 2001 shares had dropped to $120 or lower. And by October, 2002, they were under $80.

That $3,000 a quarter for 29 quarters - $87,000 in all - could have bought 746 shares, valued at $112,590 at the close of trading yesterday.

But if the price had not budged since the end of March, 2000, that $87,000 would have purchased 579 shares, worth about $87,390.

The difference, more than $25,000, is a 29 percent gain (not counting dividend reinvestment, or trading costs, which would somewhat offset each other).

An investor buying S&P 500 clones through a 401(k) program would likely have done even better, assuming that the plan fees were lower than the SPY stock's dividend.

So, those who kept the faith got it back and then some.

Edward Jones' Mr. Skrainka likes to say that "market declines return investments to their rightful owners, those who understand what they own and why they own it."

However, Mr. Ruma cautioned that investors have to be aware of their "comfort level" and their time horizon before retirement.

"If you have 10 to 15 years until retirement, and you [might] be retired 25 years after that, you have a 35-to-40-year time window and time to ride out [another severe bear market]," he said.

Otherwise, it might pay to be somewhat more conservative.

OK. The bear can be our friend. But a lot of us would just as soon wait a long time before seeing another one like the last one.