The Wild Ride to Retirement Security

Last Updated Apr 7, 2009 4:18 PM EDT

The path to retirement can be a wild ride, but you have to accept that confronting scary markets is part of the struggle to build financial independence. If you spend much time studying stock market returns, you will learn that contrary to popular opinion, we have been here before.

Between 1966 and 1982, the Dow Jones Industrial Average basically went nowhere. That was a 16 year cycle. Also, the bear market decline in 1973-74 took the Dow back to where it had been about 16 years earlier.

If you were investing during the 1990s, these lousy cycles appeared on the popular stock market charts that illustrated how the stock market can help investors build wealth over the long term. We knew about the Great Depression and the terrible 1960s and 1970s -- they were right there on the charts -- yet we invested in stocks.

If we thought stocks worked for the long term in the 1990s, why do we doubt it today? The reason is that the 20 year bull market from 1980 to 1999 lulled us into a sense of complacency about the path to economic security. We didn't think we would have to endure one of these terrible cycles.

But each of these punishing stock market cycles was eventually followed by a big bull market. Now there are no guarantees, but the highest probability strategy for your stock holdings is to stay invested. When the good returns come, your wealth will accelerate. You can make up for the declines from a long bear market with a burst of returns from a bull market.

Consider the following example. Let's assume you turned 35 in 1962 and planned to retire at age 65 in 1992. To fund your retirement, you decided to invest $10,000 a year (adjusted for inflation) into a balanced portfolio over the next 30 years. How would you have done?

Well, as mentioned, the 1960s and 1970s were two of the worst decades for financial markets. There was one huge bear market in 1973-1974 ( a 50 percent decline) and then terrible inflation. After investing for 20 years, by 1981 your retirement account would have been worth about $595,000. Your return was positive, but it was pretty modest for a 20 year cycle. In fact, there was a famous cover story that appeared in "Business Week" in 1979 called The Death of Equities, arguing that stocks may not be great long term investments.

But consider what happened next. Between 1982 and the end of 1991, the stock market exploded. As a result of this bull market, your wealth would have grown from $595,000 to over $3.4 million. You had to have patience and discipline, but eventually the long term values created by a growing economy were reflected in the financial markets. Now, you know past performance is no guarantee of future returns, but history has good lessons for us all.

So stay balanced and diversified, and don't get discouraged by recent market pricing. It is part of the struggle to build financial independence. Remember that prior investors had to suffer through similar fates.