Stock slump in 2000-2002 offers useful lessons today

ON THE MONEY

August 26, 2007|By GAIL MARKSJARVIS | GAIL MARKSJARVIS,TRIBUNE MEDIA SERVICES

Investors who lost close to half their money in the stock market between 2000 and 2002 are still scarred by the experience.

And as the stock market has sunk from its mid-July highs, they have been wrestling with themselves, trying to figure out their next move, given the promises they made to themselves amid the market's fury a few years ago.

Many vowed then not to hesitate ever again, but to move quickly out of their stocks and stock funds at the first sign of trouble.

Still, the stock market dropped so fast recently, savings dwindled before investors could protect their money. And the market has been sending mixed signals about whether the worst has passed.

With the outlook murky, you might find assurance about the future of your investments by looking back at one of the worst stock market periods of all time - the March 2000 to October 2002 drop of 49 percent in the benchmark Standard & Poor's 500.

Let's start with the most painful circumstance - the person who put all his money into the stock market amid the euphoric days of the late 1990s rally, and then was paralyzed as the stock market turned down in March 2000. Say the person invested $10,000 just before the market started plunging, then opted to give up during the grim days of October 2002.

He could have decided then to flee to safety and put all the money into CDs and a savings account. Perhaps he would have earned about 5 percent a year on the investments. But now, after about five years of safekeeping, the investor would have only about $8,140.

Had the investor held on, more than seven years after making a $10,000 investment in the stock market through the Vanguard 500 stock market index fund, he would have about $11,940.

That's not a great outcome after seven years, but it beats the loss the investor took when he panicked well into the downturn.

But consider three other investors, who did what good investors are supposed to do: They bought a broad mixture of stocks - large and small U.S. companies, plus international businesses - and also bonds. Then they held on even though they lost money between March 2000 and October 2002.

Whether they had been aggressive or fairly conservative, they would have come out of the turmoil in better shape than either the investor who panicked during the downturn, or the person who invested 100 percent in stocks at the market's peak and held on.

To give you a simple glimpse at the diversified investor who blends different amounts of stocks and bonds, I looked at three Vanguard funds geared toward specific types of investors:

The LifeStrategy Growth fund geared toward aggressive investors, or people willing to take substantial risks on stocks; the LifeStrategy Moderate Growth fund, geared toward people who will take moderate risks with stocks, and the LifeStrategy Conservative Growth fund, aimed at fairly conservative investors.

During the last seven years, the aggressive investor did not do as well as the fairly conservative investor.

The aggressive investor, who invested $10,000 in LifeStrategy Growth in 2000 just before the market started to plunge, has about $13,800 now.

The investor who held some stocks throughout the market tumult but also had 55 percent of the money in bonds ended up the best. That investor, in the LifeStrategy Conservative Growth fund, would now have about $14,700.

The person who adopted the strategy of investing about 65 percent of his money in stocks and 35 percent in bonds through the LifeStrategy Moderate Growth fund would have about $14,400 now.

gmarksjarvis@tribune.com

Gail MarksJarvis writes for Tribune Media Services.

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