How to Build Wealth, Even in a Great Depression

Last Updated Apr 6, 2009 6:12 PM EDT

Worried about investing in this ugly market? A close look at stock market returns from the Great Depression might buck you up. If you follow the fundamentals, you might easily come out much richer at the other end.

Most people assume stock market returns throughout the 1930s were uniformly terrible -- but it isn't true. Only some of the years were terrible, and that fact helps illustrate a key strategy for long-term investors.

Suppose you invested $10,000 a year in the stock market starting in 1929. Where would you stand by the end of 1934? Unsurprisingly, in negative territory: you'd have contributed $60,000, but your account would be worth only about $58,000. Still, that's probably not as bad you expected, especially given that the stock market dropped more than 80 percent at the start of the Great Depression.

The market, however, began recovering in 1933, when the S&P 500 rose almost 54 percent -- its best one-year return ever, by the way. By 1936, your contributions would total $80,000, and your retirement balance would stand at $148,000. That's right -- your account would actually rise in value during the Great Depression. If you continued to invest over the next 30 years, your retirement plan would be worth a whopping $3.2 million by 1958, or more than 10 times the $300,000 you'd contributed.
This is, of course, a hypothetical example based on historical S&P 500 returns, but it does illustrate the often underappreciated benefits of dollar-cost averaging -- the practice of investing fixed sums at regular intervals so as to take advantage of price dips. Dollar-cost averaging is one of the fundamental building blocks of personal wealth. While there's no guarantee that your future returns will be positive, the odds are on your side if you consistently add to a balanced retirement portfolio and stay focused on the long term.

America is a pretty amazing country, and we usually get it right.