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The Stock Market 'Double Double': A Reason for Optimism

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 2010. This chart provides a good visual of what I call the "stock market double double."

If you look at the chart again, you'll see that there are approximately twice as many "up" years as "down" years; 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.

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 and you just have to wait for the "up" years to return. So far, 2009 and 2010 have given us hope!

In addition, this chart 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 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.

Have the patience to let the stock market "double double" work for you. Having said that, 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 protection against the extremes of downturns and inflation, while providing a return that should be sufficient to finance your retirement years.

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