The Bear Market's Silver Lining
Young investors: If your retirement or investment account took a beating by the bear market, don't worry -- and don't bail on stocks. A new study by T. Rowe Price shows that people who began systematically investing in stocks in past severe bear markets were significantly better off 30 years later than investors who began investing in bull markets.
"The sequence of returns matters more than people may think," says Christine Fahlund, a senior financial planner with T. Rowe Price. "Starting systematic contributions to your retirement account during a bear market can be tough, but it may give you the opportunity to purchase a larger number of shares for the same amount of money, which could prove very beneficial by the time you retire." If you buy only during bull markets, you'll pay more for fewer shares.
The T. Rowe Price study used four hypothetical investors who contributed $500 a month over a 30-year-period to a portfolio that replicated the Standard & Poor's 500-stock index. One started investing in 1929 and one in 1970 -- just before the two worst bear markets in history. The other two started investing in 1950 and 1979 -- on the verge of bull markets. These two had much stronger starts but their ending balances were half that of the other two investors who started buying stocks in a bear market.
So, yes, there is a silver lining to the bear market if you're in your twenties or thirties and your account has time to recover. You also can benefit from the economic downturn. See 4 Ways for Young Adults to Capitalize on the Recession to find out how.