The 2007-08 bear market has been the worst since the Great Depression, more savage than that of 1973-74, which most of us remember only dimly, if at all, and 2000-02, which we remember all too well.
What's more, the combination of two deep bears in less than a decade has poisoned many people against common stocks. The Standard & Poor's 500 Index ($INX) has gone down an average of 0.9% a year over the past 10 years, from November 1998 through November 2008. Given this sobering lesson, who would want to own these things?
You would.
Whether you're just getting started as an investor or rebuilding a portfolio shattered by the recent chaos, you need to remember that how well you do depends on what you pay at the outset. And prices now are at rock bottom.
"Today, in my view, the stock market is presenting you with one of the great buying opportunities of your lifetime -- perhaps the greatest," says Steve Leuthold, the manager of the Leuthold Core Investment (LCORX) fund, which ranks in the top 2% of similar funds over the past 10 years. "Buy 'em when they hate 'em."
Since this bear market began 14 months ago, virtually every asset class, from foreign and domestic stocks to commodities to real estate, has been driven down at least 50%. Even among bonds, only U.S. Treasurys have held up well. The benefits of diversification, in short, have proved to be illusory.
But that doesn't mean -- in the words every market loser has uttered -- that this time it's different.
"The importance of asset allocation, the insidious power of inflation, diversification using uncorrelated asset classes and long-term stock market performance still exist," says Michael L. Kalscheur, a financial consultant with Castle Wealth Advisors in Indianapolis. "Most people are looking at the most recent information and assume that's how it will always be. It will not always be this way."
Whether you're building a portfolio or rebuilding an old one, the tried-and-true lessons still apply: Balance risks against each other while relying on equities to build wealth. If you have become increasingly defensive over the past year -- and most people have -- now is the time to reverse the process.
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How much worse could it get?
I believe the bear market is over. But say I'm wrong and it's not. Having fallen more than 50% already, just how much further can stock prices fall? How much risk remains?Junk bonds are yielding 22%, nearly twice their historical average. Since the vast majority of corporate bonds are rated junk, do you really believe more than half of the American private sector is going to go broke? That didn't happen even in the Great Depression.
Here is what you should not do in the coming year: Wade cautiously back into risky markets such as stocks, dollar-cost averaging your way back to a normal, stock-heavy portfolio.
This is the time to plunge. Dollar-cost averaging is almost never a good idea, as I explained in a recent column, but it's a really lousy idea right now.
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New to investing? Where to beginIt can look complicated, but it doesn't need to be. Just follow the guide in MSN Money's New Investor Center, starting here with Part 1.
That's because stock market recoveries tend to be front-loaded. Since 1900, according to Leuthold's research, "the median first-year price gain of 40.9% represents almost half of the median 83.6% total bull market gain for the Dow." Gains in the first three months are the sharpest of all, averaging just over 18%.
So take the money you've got to invest -- all of it -- and build (or rebuild) your portfolio today.
By the way: I'm doing this myself in my own portfolio, and subscribers to my newsletter, ETF Insider, have already done it, effective Dec. 1. Since bonds have remained positive throughout the bear market, we had profits in them, which we trimmed. We added that to the cash hoard we had built up when we cut back on our riskiest positions earlier in the year, and we swapped nearly everything into foreign and, primarily, domestic stock funds. We also bolstered our holdings of emerging market stocks and commercial real estate, which had been beaten down the most.
Continued: Building your portfolio
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