The graph shows the two worst stock market crashes since the great depression.
The black (generally on the top) line shows the percent change of the
S&P 500 total return index (assumes dividends are reinvested) compared
to its peak on January 11, 1973. We see that it did not get back to that
level for 3.5 years, and it took over six years before it really got much
higher. Keep in mind that inflation was high in the 1970s (remember President
Ford's WIN for Whip Inflation Now button?), so even after the total return
index recovered all of its losses, there was a loss in purchasing power.
This can be seen in the graph of the inflation adjusted Dow on an
earlier page.
The blue shows the index itself without
taking dividends into account compared to the 1/11/73 peak. Dividend yields
were much higher then and generally kept pace with inflation although not
with the peak inflation of the late 1970s and early 1980s. Consequently,
this line is a better estimate of the change in purchasing power of stocks.
Also it may be a better analog to today's low dividend environment. It took
7.5 years, until mid-1980, before the S&P got back to its early 1973 level,
and it was two more years before it moved and stayed significantly higher.
The red shows the current drop relative to
its high on September 1, 2000. (The index itself made highs earlier that
year, but almost recovered them so the total return high was on that date.)
We see the loss was comparable to the earlier period--nearly half the value.
At the end of 2006 it is barely above the high more than six years in the
past, which is an anemic rate of return. The drop in 1973-74 was in the
middle of the 1966-81 secular bear market. The drop starting in 2000 was
at the beginning of a secular bear market. Unless this one is going to be
extremely short, which seems unlikely since stocks have been overvalued
by most measures, we are in for more breaktaking market plunges in the
coming years. Do you want to take the risk of seeing the value of your
stock holdings cut in half once again? That may well happen if you
just "buy and hold."
The S&P 500 index, which is shown in the graph, is a very good measure of
the broad U.S. stock market, but some of the sectors will perform quite
differently. High technology is one of those. It is represented significantly
in the S&P, but the popular Nasdaq Composite index of stocks that are not
listed on the major exchanges is much more heavily weighted with technology issues.
That sector and the index had incredible gains in 1998 and 1999, which attracted
a considerable amount of buying that contributed to the enormous gains. Many
retirement plan holders decided that the quickest way to achieve their goals
was to load up on technology stocks and ignore the risk reduction that diversification
provides. Unless they moved out in a timely manner, these investors' high
technology holdings were devasted to a much greater extent than the S&P. The
Nasdaq fell by nearly 80% from its highs. Although it has more than
doubled its low value in October 2002, at the end of 2007 it is almost 50% below
its high level in March 2000. That means it must come pretty close to doubling from current levels just to
wipe out the losses. Do you think that going to happen anytime soon? I would not
be surprised if it takes another decade or longer.
These examples show the real dangers of just buying and holding stocks during
a secular bear market. No doubt some retirement plans have been destroyed by
what has happened since 2000. In this type of market there is a significant
chance that stocks will again fall to or below their late 2002 levels. On
the next page, you will see that the standard
advice and guidelines provided by the Wall Street mainstream are not likely to
solve the problem of reducing the risks to retirement and other plans.