NEW YORK (CNN/Money) -
What is the longest recorded bear market in history? I'm 30, and I had the misfortune to begin aggressively saving for retirement a little over three years ago, just before the market crash. I would have been better off putting the money underneath my mattress. And there seems to be no end in sight. How, exactly, is saving for retirement supposed to help me again?
-- Andrew Davis, Atlanta, Georgia
Believe me, as someone who works for a company (i.e., AOL Time Warner) whose stock price has imploded over the past few years and who owned a considerable amount of that stock in 401(k) matching funds that couldn't be moved until most of the damage was done (what, me bitter?), I feel your pain. And I know there are hundreds of thousands of other people out there in a similar position to yours, or worse.
But instead of going on a joint crying binge about our losses or sink into sullen recrimination or despair, let's start with your question about bear markets and then see if there's any lesson from the past that we can apply to today's situation.
A history lesson
I skimmed over some annual returns for the large-cap stocks listed on the New York Stock Exchange from 1815 to the early years of the 20th century that were compiled by Chicago's Ibbotson Associates.
Though I found some pretty decent down years in the late 1820s and the mid 1870's, I didn't find anything on the order of the bear market that began in September, 1929 and ran through June, 1932. That bear market dragged the Dow down some 86.7 percent.
It then took the Dow 302 months, or more than 25 years, to regain its 1929 high. That recovery period, however, doesn't include the effect of dividends that investors may have been collecting on their stocks. If you look at the break-even period in terms of total return -- that is, stock prices and dividends -- then it took investors six years less, or until January, 1945 to get back to even.
There have been other severe bear markets -- the 48.2 percent decline from January, 1973 to October, 1974 was certainly no picnic. But so far we've had nothing to compare to the bear market that ensued after the 1929 crash.
Predicting the future from the past
Of course, "so far" is the operative phrase. At this point, it's unclear how the current bear will stack up against the bear of 1929-1932. At this point, we've been in a downturn since January, 2000, when the Dow peaked at 11,723. That's 38 months and counting.
The Dow hit a low of 7,286 last October -- a decline of 38 percent -- although lately the market has been drifting toward that level with its close of 7,568 last Monday.
In any case, a 38 percent decline certainly doesn't compare to the 86.7 percent decline of the 1929-1932 bear (although Nasdaq's decline of 78 percent comes pretty damn close), but that still leaves the question of how long it will take to get back to even.
If stock prices increase 5 percent per year from a Dow level of, say, 7,600, then it would take nearly nine years to regain the Dow's 2000 high. If stock prices increase 10 percent per year, then it would take about half that time.
What does it all mean?
Okay, but what does all this mean for investors wondering what to do today? Well, one thing I think we all have to remember is that while we think of bear markets in terms of how long it takes us to get back to even, the fact is that we really should be looking ahead.
As painful as the fall from Dow 11,723 or Nasdaq 5,049 was, the real issue is how do we get the best returns from here? How do we structure our portfolio so we get the right blend of risk and reward for the money we're investing now? When I look back, what I see is plenty of evidence that stocks provide some hefty returns after a major downturn.
For example, someone who had the audacity to buy stocks at the depths of the bear market in 1932 would have earned an annualized return of 12.5 percent over the next 10 years and 14.5 percent over the subsequent 15 years. That's not surprising since you would expect stocks to be a better deal after much of the gas has been let out of the blimpish prices they reach at the end stages of a bull market, especially a wild one like we had in the 1990s. You'll find similarly attractive returns in the wake of other bear markets.
Yes, you may buy shares that will continue to go down for a while, maybe even several years. But if you're investing for the long term, fleeing stocks altogether seems to me a foolhardy thing to do. So in answer to your question of how saving for retirement is supposed to help you, I'd say that instead of taking all of the uncertainty and bad news today as a reason not to buy stocks, I'd take it as a reason to buy shares.
That's especially the case if you're investing through a retirement savings plan like a 401(k). You're picking up shares at a variety of prices, some lower than others some higher, so in effect, you're mitigating the risk of getting it at a particularly bad time.
There are no guarantees stocks will provide the best long-term returns from this point forward, which is why I'd also keep a chunk of bonds in my portfolio and some cash. But I don't think there's any doubt that stocks are a better deal today than they were in 1999 when people were certain stocks were the asset class of choice.
In short, even though now may feel like the worst possible time, I'd argue that now may actually be the best time in recent years to take some prudent risks in stocks.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He can be seen regularly Monday mornings at 7:40 am on CNNfn.