Make money when stocks stink

By Tim Middleton

Bear markets are Darwinian: They kill weak investors, but the strong get rich.

And as we are learning anew in this decade, bear markets can be both grueling and extremely, extremely long. For the U.S. stock market, the 1960s and 1970s were Lost Decades, and the current one is about as bad. The major indexes, in fact, have been trading lately well below their levels of 10 years ago.

These Lost Decades include monster bear markets -- those of 1973-74, 2000-02 and 2007-present -- during which the S&P 500 Index ($INX) plunged more than 40% each time. Those are the only such monsters since the Great Depression, and two of them have come in this decade.

And the immediate future, at least, looks even more perilous. When the S&P 500 was at its low of 855 on Friday, it was 45.8% below its peak of October 2007, and foreign markets have recently been battered even worse than our own. The headlines have described a "global panic."

The good news: Some investors have managed to prosper despite those obstacles. In fact, even in the dismal market of the past 10 years, you could have done well with some smart investing choices. (You can use the calculator on this page to see just how.)

Time is on our side

If most of your investing has been done in the past 10 years, today's market may seem uniquely bleak. But we've been here before.

Pictures being more powerful than words for describing the sorry data, look at the first chart on this page to see how the S&P 500 has performed since 1960. Your eye will probably be drawn to the happy times when the numbers were heading higher, but concentrate instead on those miserable periods when they were not.

As the first chart below shows, stocks went virtually nowhere over the first two decades of this period, as well as over the past several years. Almost all of the positive action took place between 1982 and 1999.

This refutes the notion -- which many of us are told when setting up our 401(k) plans -- that the market will deliver a 7% or 8% return, year by year, that carries us to retirement. That's the long-term average, but the gains really come in fits and starts.

But look at the same numbers in a different context.

The second chart shows how $1,000 invested annually in the S&P 500 would have grown since 1960. You did spectacularly in the 1960s because your annual contributions alone produced an increase of more than 10-fold. And you continued to do spectacularly in the 1980s and the 1990s, when your contributions were shrinking in relative terms but the market was performing like an Olympian.

The totals here include dividends, money you get paid for owning stocks even when the prices don't rise. In a tough year, dividends can give you a gain or at least ease your losses. In the 10 years ending Friday, for example, the S&P 500 was down almost 20%. But if you'd invested in the exchange-traded fund representing the S&P 500, SPDR Trust (SPY, news, msgs), dividends would have trimmed your loss to below 10%.

Near the start of this dismal decade, your kitty dipped from $400,000 at the end of 1999 to $268,500 at the end of 2002. But you were made whole again in the years that followed.

Can't afford to stop

This is the magic that compounding brings to investing over time, and it's why I worry when I hear people suggest they might stop investing or even stop saving altogether. Today's market is certainly discouraging. But you can make up for market losses much more easily than you can for lost time.

The younger you are today, the greater the rewards that lie ahead -- but only if you persevere. If you quit, all the money you might make when the market recovers is going to flow to the people who were stronger than you.

If you are older, compounding doesn't work as hard in your favor, but raising contributions can. Let's say that instead of holding contributions steady this entire period at $1,000 a year, you increased them, both because your income was going up and because you knew you had less time to save. Say you boosted contributions 5% a year. In 1975, you were chipping in $2,000 annually. By 1983 it was $3,000. By 2000 it was $7,000 a year.

These aren't millionaire-size contributions, but you end up with a millionaire's outcome: The kitty at the end of 2007 is $1,008,858, as the chart below shows.

So far this year, of course, you'd be way down. The S&P 500 has declined nearly 40%, shrinking your kitty to $605,314. But over the years, you'd have contributed only $188,025, for a 221% gain.
These gains are what markets are capable of delivering to your personal bottom line, even over a period when they have been generally adverse almost half the time.

And these examples show only what the S&P 500 -- domestic large-capitalization stocks -- has done. Small caps have outperformed big caps over this period, particularly in that desolate period of the 1970s. And key sectors have delivered many times the market's return over the past 10 years.

The simple calculator on this page allows you to run various asset mixes over the past 10 years. (It uses ETFs known as spiders that track key segments of the S&P 500, as well as a couple of other choices to represent small caps and international stocks. In the real world, of course, you have many more choices.) You'll see that with the right selections, you could have done quite well even in a stagnant market.

The leading segments will likely be different over the next 10 years, but there will be outperformers even if we have another Lost Decade ahead.

So forget about the naysayers. They won't be sending you checks in retirement. The more money you invest and the more intelligently you invest it, the better off you will be, whatever the market does to you over the next decade and on into retirement.

Meet Tim Middleton at The Money Show

MSN Money's Tim Middleton will be among more than 50 investing experts gathered in the nation's capital Nov. 6-8 for the fourth annual Money Show Washington, D.C. Just days after the election, this elite group will present more than 170 free workshops to help you prepare for changes in the political landscape. Admission is free for MSN Money users.

To register, call 1-800-970-4355 and mention priority code 009554, or visit the Money Show Washington, D.C., Web site.

At the time of publication, Tim Middleton didn't own any stocks or funds mentioned in this article.