Stock market "double-double": A reason for optimism

(MoneyWatch) Each year I update a chart that shows the annual percentage returns in the S&P 500 for every year since 1926; below is the version through the end of 2012. This chart provides a good visual of what I call the "stock market double-double."

By the way, the returns shown here include both capital gains/losses and dividends.

If you look closely at the chart, you'll see that there are approximately twice as many up years as down; that's part one of the double-double. Here's part two: The up bars go up about twice as high as the down bars go down, meaning that when the market went up, you typically made much more money than you lost when the market went down.

Note that 2008 was the second-worst year on record. If you believe that the stock market will come back from its big drop in 2008, you have history on your side -- you just have to suppress the urge to panic and sell at the bottom of the market, and wait for the up years to return. So far, 2009, 2010, 2011 and 2012 have given us four years of positive returns. The return for 2012 was a robust 16 percent, aided by a last-day rally due to the possible resolution of the so-called "fiscal cliff."

This chart also provides evidence that so far, we're not in the territory of the Great Depression. The worst year on record -- 1931 -- was preceded by two down years and was also followed by a down year. So far, 2008 is surrounded by up years.

For most of us, our retirement investing horizon gives us the time to ride out the downturns. It particularly helps if you build complementary sources of retirement security that aren't susceptible to market fluctuations, which I highly encourage you to do.

I'd also encourage you not to go whole hog and invest too much in stocks. A diversified portfolio of stocks, bonds, cash and possibly real estate has proven to provide adequate protection against the extremes of downturns and inflation while providing a return that should be sufficient to finance your retirement years. And by the fall of 2011, many diversified portfolios recovered to exceed their pre-crash highs -- more evidence for optimism when using a balanced portfolio.

Have the patience to let the stock market "double-double" work for you.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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