History shows it’s irrational to abandon stocks as a part of an investment portfolio at a time such as this. The kind of fear-based selling that has driven down the markets during recent months has, without exception, created tremendous opportunity in those same markets following similar periods in the past.

For Thrift Savings Plan participants who are, or will shortly be, relying on their TSP accounts for income, missing this opportunity to recover some of their losses could turn a temporary setback into a permanent one.

To put things in perspective, let’s review each bear market since 1900 that is even fairly close to the magnitude and intensity of the one we’ve been dealing with for the past 15 months.

During the 1929 to 1932 bear market, the Dow Jones Industrial Average – an index of 30 leading domestic industrial company stocks – lost nearly 90 percent of its peak value. It was, by far, the most devastating loss in stock market value in the past 100 years.

You may have heard the oft-repeated anecdote that it took investors about 25 years to recover what they lost in that bear market. While technically correct – it took a quarter of a century for the index to again reach the ridiculously lofty levels it had reached just before the crash in 1929 – this isn’t the entire picture. What happened if you took the ride down, hung on and continued investing in stocks? Following the market’s bottom in 1932, it abruptly reversed itself and rose by an astonishing 187 percent over the next five years. Investing in stocks at, or near, the end of one of the worst market periods in our history proved to be a profitable decision.

In 1937, the market crashed again, losing nearly 50 percent of its value. Once the market bottomed, right when things seemed at their worst, investors jumped back into stocks and drove the market up more than 60 percent in one year. That year was a great time to be in stocks.

After this recovery, the market lost more than 40 percent of its value between 1938 and 1942. This devastating crash was immediately followed by a gain of more than 128 percent between 1942 and 1946. Not a bad return for investing in something that people were cursing for gobbling up wealth.

Stocks continued to produce tremendous returns through the 1950s and most of the 1960s. By 1973, the Dow Jones Industrial Average had reached another new high before losing 45 percent of its value in less than two years. But, by 1976, it had again risen by more than 75 percent from its bear market bottom.

Then, during the crash led by the tech market from 2000 to 2002, the Dow gave up about 33 percent of its value before reversing itself with a gain of more than 39 percent over the following two years. This bull market continued from the 2002 bottom to produce a total gain of more than 83 percent by the market peak in 2007.

Our current bear market, in its second year, has produced a loss of as much as nearly 54 percent as I write this March 26. The Dow has risen more than 20 percent from its recent low over the past three weeks, however, and who knows where it will go next? The right amount of stock exposure varies from investor to investor, but most investors, particularly those under age 75, will benefit from holding some C, S and I fund shares in their TSP accounts. So, before you move everything to the G or F funds, consider
how much of the problem caused by this bear market would be solved by gains of 50 percent over the next two or three years. Not only is this scenario possible, but based on history, it’s the odds-on bet.

Written by Mike Miles
For the Federal Times
Publication March 30, 2009