Maybe Investors Should Buy

Maybe Investors Should Buy, Buy, Buy and Hold
by Paul J. LimTuesday, December 23, 2008

What's the best way to recoup losses suffered in a bear market?
For most of the past quarter century, the answer was simple. All you had to do was hold stocks and wait for the next bull market.
But if investors need their portfolios to climb back to pre-bear levels anytime soon, just staying put may not be enough this time. In fact, painful as it may seem, it may be necessary to sock away more money, if the goal is to return to even in the next couple of years.

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"The only way to erase the whiteboard and get back to where you were soon is to start contributing more to your portfolio," said Christine Fahlund, senior financial planner at T. Rowe Price.
For the last couple of decades, investors haven't had to step up their savings because the stock market did the work for them. Since 1982, the Standard & Poor's 500-stock index has recouped about 88 cents, on average, of every dollar lost in a bear market by the end of the first year of the subsequent bull market. By the end of the second year, that dollar would have been recovered, and then gone up an additional 18 cents.
But it may not make sense to plan on that timetable now. That's because 2008 was no ordinary year, and the current downturn may not follow the pattern of recent bear markets.
In 2008 alone, the S.& P. 500 has lost more -- about 40 percent -- than it usually does during an entire bear market, which historically lasts 16 months. And we don't know when this bear market will end, or when the next bull will begin.
Sure, it would be great if smart choices in asset allocation or purchases of stocks and funds could quickly get us back to break-even. But the math simply doesn't add up.
Say you were willing to be super-aggressive, especially now that stocks are trading at relatively cheap prices. And assume for the moment that this bear market has run its course. Even if you plan to be 100 percent in stocks, it may easily take another four years just to return to where you were at the start of this year.

Why?
Assume that you started 2008 with $100,000 invested in stocks, and, to keep the calculations simple, that you have about $60,000 left in your account now, roughly tracking the decline of the S.& P.
Let's be optimistic for a moment. Historically, the first year of a new bull market comes with a surge -- a 38 percent climb in the S.& P., on average, since World War II. That would bring your portfolio back to just under $83,000. In the second year of a bull market, stocks tend to rise by around 11 percent. So your account would recover to about $92,000. In Year 3, prices historically rise 4 percent. That would take your nest egg to just under $96,000.
Only in the fourth year, which takes you all the way to 2012, would you climb back above $100,000.
Of course, all of this assumes that you're fully invested in stocks, and uses the rosiest of scenarios: that the bear market is over and that stocks are on the verge of a multiyear rally.
Is it wise to embrace those assumptions? Given the state of the economy, maybe not. It could take years for the market to fully recover from the excesses that created the recent bubble.
Investors should keep in mind that "there's often a difference between the end of a bear-market correction and the beginning of a new bull-market phase," said Susan M. Byrne, chairwoman and chief investment officer at the Westwood Management Corporation, a registered investment adviser based in Dallas. "After the bear market ended in 1974, it wasn't until July of 1982 that I first started to think that we were really out of it."
What's more, investors don't seem to be in the mood to bet aggressively on stocks.
According to Hewitt Associates, the employee benefits consulting firm, only 52 percent of 401(k) money is currently held in equities, down from 69 percent last year.

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Some of that shift occurred because stocks have fallen so much, but another reason is that retirement investors haven't been "rebalancing" their accounts to get back to their original weighting in equities. "I think the inclination is going to be to hunker down, move out of equities and reduce contributions to the plan," said Lori Lucas, defined-contribution practice leader at Callan Associates, an investment consulting firm based in San Francisco.
So far, 401(k) investors haven't altered their savings rate significantly. According to Hewitt, 401(k) participants contributed 7.8 percent of their pay, on average, to their retirement accounts this year. That's down marginally from 8 percent in 2007.
That is well shy of the 15 percent annual savings rate that financial planners often suggest as a safe target. "It's going to be a real uphill battle to convince people they need to save more now," Ms. Lucas said.
For those who are still well within their working years, their savings rate is likely to be the biggest determinant of whether they can reach goals like financing a long retirement, said Ms. Fahlund of T. Rowe Price.
That's not to say that asset allocation and market returns aren't important. But if you're years from retiring, the rate at which you save matters now more than ever.

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

http://finance.yahoo.com/banking-budgeting/article/106343/Maybe-Investors-Should-Buy-Buy-Buy-and-Hold