Another page in the book of investing history is over. Was it just a bad dream? No. Your Thrift Savings Plan statement probably proves how real it was. Believe it, and – most importantly – accept it.

To many investors, a year in the stock market like the one we just finished seemed almost impossible against the backdrop of history. The 18 years from the beginning of 1982 to the end of 1999 produced the most remarkable bull market of the 20th century. No other period in the century saw stock prices climb so far so fast. Large-company domestic stock prices, as measured by the Dow Jones 30 and Standard & Poor’s 500 indexes, rose by about 1,100 percent. That compounded rate of return averaged nearly 15 percent per year, and that’s without considering the benefit of the dividends paid to the owners of those stocks. What’s more, this march upward in values was almost completely without interruption. Even the market “crash” of 1987 – when the Dow Jones inexplicably fell about 30 percent in two months’ time and then recovered – looks mild in retrospect.

During this great bull market, investors were regularly warned about the risks they faced riding the bull. Early on, these warnings probably had some real benefit, reminding us that our best expectations might not be met and that our worst performance-related fears were a possibility. But, by the early ’90s, many investors were immune to concern. If markets were risky, then bring them on. If this was risk, we wanted more, not less. Any money that flowed into the markets was quickly multiplied.

Experience began to teach us that not only was market risk profitable, but more risk seemed to produce more profit. I clearly remember arguing with clients in the late ’90s any time I recommended a portfolio consisting of anything other than a handful of tech stocks. Like participants in a successful Ponzi scheme, investors of the ’80s and ’90s were convinced that any money in stocks was smart money.

Then came the tech-bubble burst of 2000, and stock prices fell 50 percent over three years. This was a clear sign that things had changed, but not clear enough to prevent prices from rising nearly 100 percent from 2003 through most of 2007. Many of us seemed to figure that the tech stock bubble’s bursting was an anomaly – a brief retreat in the forward march for stock prices.

The past year has driven home the reality that stock prices can and do go down – a lot. It taught us again there is no free lunch. If prices are expected to rise 10 percent per year over the long run, for example, then 15 percent per year over nearly 20 years creates a debt that must eventually be repaid.

Ironically, many investors seem to perceive the greatest investment risk after prices have fallen, when in reality, the risk was at its peak just before prices fell. The time to feel anxious was in late 2007 when prices were at or above their tech-bubble peak once again, not now that they are back to 2002 lows. There is still the ever-present risk of price declines, but nothing like the risk in mid-2007.

The past 10 years in the stock market, taken as a whole, offers a brutal but valuable lesson. The game is more complex, and difficult to navigate, than many thought. In the ’80s and ’90s , everyone was an investment genius. Those two decades turned millions – amateurs and professionals, alike – into stock-picking whizzes. It was capitalism at its finest, I guess.

Hopefully, it’s now clear that a falling tide strands all boats, just as a rising tide lifted them. Many professional stock whizzes – and some of their venerable firms – are out of business, just as their clients are out of luck. Many amateur stock pickers are broke, or at least planning to work a while longer at their day jobs.

As we head into 2009, filled with hope for a brighter day, I urge you remember the lessons of 2008, and to build sound plans that rely on reasonable expectations and allow for the possibility of bad luck. Plans like these make for sound sleep and happy days no matter the weather.

Written by Mike Miles
For the Federal Times
Publication January 12, 2009