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The stock market—what good is it?
By Gene Walden

For years, financial experts have encouraged investors to save for retirement by investing in the stock market. Most company 401k plans give investors a handful of stock mutual funds to choose from to make it easier to participate in the market.

That strategy worked well through the 1990s when stocks had an outstanding run. But the past 10 years has been an abysmal period for stocks. If you were counting on stock mutual funds to build your retirement savings, the truth is, you would have been better served to simply put your money in the bank.

In fact, the decade of 2000 to 2009 promises to be the worst decade for stocks since the Standard & Poor’s 500 (S&P) was introduced in the 1920s. 

Since the start of the decade, the stock market has actually lost ground. The S&P opened in Jan. 2000 at 1469 and was trading around 849 on Jan. 29, 2009—a 42 percent decline. If you had your money in stock mutual funds, you’re probably down even further. Funds typically impose annual fees of 1 to 2 percent plus other expenses that can take a bite out of the total return. Add another 2 percent per year for fund costs for the past nine years, and the total loss for a mutual fund investor could be as much as 50 percent.

In other words, if you had $1 million in the market in 2000, you could be down to about $500,000 today. You would have fared even worse if you had your money in the NASDAQ Composite stocks. That index was at 4131 at the start of the decade and is now around 1512—a 63 percent decline.

If you go back a full 10 years, the S&P is down about 34 percent. Not all stocks have fared as poorly. The S&P Mid Cap Index is up about 44 percent, the Russell 2000, which is a composite index made up primarily of small stocks, is up about 21 percent.

Minnesota stocks have done considerably better than the index. The Bloomberg Star-Tribune Index of the 100 largest regional stocks is up about 1.9 percent per year over the past 10 years. Some of the local success stories include 3M, up from $38.81 to about $57 the past 10 years, Ecolab, up from 19.38 to about $35;Toro, up from $8.69 to $31.24; Donaldson, up from $9.16 to about $31; and Bemis, up from $17 to about $23. (Note to editor, these are prices from Jan. 29, 1999 through today.)

But for the S&P 500, this would be the first negative decade in history. According to Standard and Poor’s, the S&P had an average annual return of 5.3 percent in the 1930s, 10.3 percent in the 1940s, 20.8 percent in the 1950s, 8.7 percent in the 1960s, 7.5 percent in the 1970s, 18.2 percent in the 1980s, and 18.9 percent in the 1990s.

Time to give up on stocks?
Is it time to give up on stocks and put your retirement savings into something safer? Susan Stiles, president of Minnetonka-based Stiles Financial Services, is not ready to give up on stocks. “After two straight decades of average annual returns above 18 percent, maybe we were due for a bad decade.” But she believes stocks could certainly bounce back to their historic averages once we’ve made it through the current financial crisis.

She refers to a stock market theory known as the “mean reversion” that states that stocks will always revert to their historic averages. After two big decades of growth, stocks may have been due for a tumble. But after this decade of negative returns, stocks could bounce next decade. “The message here is very clear,” says Stiles. “This decade is as bad as the 1990s was good.”

Stiles believes it would be a mistake for investors to change course now. Investors who move in and out of the stock market based on short-term market performance often end up on the short end. “In the 1990s, we saw a lot of conservative investors who were on the sidelines through much of the run-up in the market. Finally, their anxiety took over. They thought they were missing the boat so they jumped into the market when it was at a high level and ended up taking some big losses when the market dropped.

“That was a case of long-term investors making short-term decisions,” adds Stiles. “It’s that short-term behavior that really hurts their long-term returns.”

Instead of changing strategies in response to short-term market performance, Stiles says investors should stick with the allocation that corresponds to their risk threshold profile. “A typical asset allocation might be 60 percent stocks and 40 percent fixed income and other investments. Then, based on your risk threshold, time frame, and other personal factors, you might adjust that allocation.”

The key to long-term success, says Stiles, is to resist changing that asset mix in response to short-term market performance. She also recommends continuing a consistent dollar cost averaging strategy through good times and bad so that you continue to put money into stocks regularly regardless of the level of the market.

Ultimately, when the market starts to move back up, the money you invest in the down times will enjoy outstanding growth.

When can we expect stocks to return to the performance levels we had come to expect in the past? Stiles believes the country’s ability to weather the financial crisis will dictate the performance of the market in the months and years ahead. “We are a resilient country with a resilient economy and smart, hard-working individuals. So I think we should be poised for the next decade to be a good one. But,” adds Stiles, “at the end of the day, it all depends…”



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