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MarksJarvis: Lessons from the crash

Five years later, investors are waiting to get back to normal after losing 57 percent in the stock market

Gail MarksJarvis

October 10, 2012

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It's an anniversary filled with a sense of relief and foreboding

Five years ago, the stock market hit a high on Oct. 9, 2007, and then terrified Americans as it crashed 57 percent over 17 months, destroying 401(k)s, college savings and dreams for the future.

Five years later, the Standard & Poor's 500 index — a common measure of the stock market — is at 1441.48 and almost back to even. It remains nearly 8 percent below its October 2007 peak of 1565 and serves as a reminder that a cruel period in the stock market can leave people bruised for a long time.

Yet the average person who left money in a stock index mutual fund has probably recovered what was lost.

Individuals with mutual funds in 401(k) accounts typically have their dividends reinvested. So with a fund like the Vanguard 500 index, people would now have about 3.4 percent more than they had on Oct. 9, 2007. The S&P 500 is currently up about 4 percent with dividends reinvested, said Standard & Poor's analyst Howard Silverblatt.

A 4 percent gain is hardly the type of return people expect, or need, to earn over five years. And it's a bitter pill for people who became accustomed to the unusual 18 percent returns they earned annually in the 1990s. Still, investors can take some solace in the fact that they didn't lose everything, although many feared such an outcome while stocks were plunging in 2008 and early 2009.

Research by the Leuthold Group shows that after stocks plunge 20 percent or more in bear markets, the average time to recover from the losses is 21/2 years. But there have been outliers like the most recent one, or the seven years it took to recover after the 1973-'74 crash.

This time, the 500 stocks of the S&P have climbed more than 90 percent since the worst point in March 2009 and still have a way to go. But those who followed the precepts of investing by holding a diverse mixture of stocks and bonds are in solid positive territory.

"Diversification does work," said Jack Ablin, chief investment officer of BMO Private Bank. "It requires patience and trust, but it works ... although people don't have much trust now."

Individuals who invested half their money in the S&P 500 and half in bonds through the Barclays Aggregate Bond Index on Oct. 9, 2007, would have lost a sizable sum by the worst point after the market crash. By February 2009, a $10,000 investment would have dwindled to just $7,492, according to Morningstar data. Since that scary point in 2009, there has been significant healing: An investor would have about $12,500 now.

It's difficult to wait for such gains, however, and many people didn't. Since the beginning of 2008, they have pulled more than $439 billion out of stock funds and poured about $980 billion into bond funds, according to the Investment Company Institute. This year, while the S&P 500 climbed about 15 percent, they yanked about $83 billion out of stock funds, according to Morningstar. Individuals say they don't want to press their luck after getting close to even. They continue to feel more comfortable with bond funds, pouring $237 billion into them this year despite warnings that interest rates are too low even for risky bonds that could plunge along with stocks in a downturn.

Current market conditions leave people in a quandary if they are waiting for an all-clear sign to re-enter the stock market.

Analysts have warned repeatedly this year that stocks seemed to be climbing more than economic conditions warranted.

Strategist Ed Yardeni said much of the rise in stocks seemed to come as investors worried about an "apocalypse" in Europe and then pushed stocks higher each time it seemed like a debt disaster there might be averted.

"The stock market loves apocalyptic scenarios that are postponed," he said.

But with no resolution of Europe's debt crisis yet clear, the International Monetary Fund warned Tuesday that Europe's economic problems, mixed with a lackluster U.S. economy, are threatening the global economy.

The Dow Jones industrial average dropped 110 points after the IMF presented a gloomy picture of the global economy and warned that risks of a global recession are climbing. After lowering growth expectations in the spring, the IMF did so again this week to just 3.3 percent. Recession and debt concerns in parts of Europe and a tepid U.S. economy are removing opportunities for countries such as China, India and Brazil to sell their products.

Global weakness is also expected to show up as large U.S. multinational companies report their third-quarter profits over the next few weeks. For the first time since 2009, analysts are expecting earnings to decline 2 percent. Goldman Sachs strategist David Kostin thinks investors have been too complacent and stocks could fall before the end of the year.

But others say expectations could turn out too negative. As corporate executives use earnings reporting season to talk about stronger sales in 2013, the stock market could climb.

Because disappointing profits could cause stocks to plunge, Ablin says this is probably not the time for people who have been waiting for the all-clear to throw a lot of money into the stock market. There may be better opportunities to buy stocks in the weeks ahead, he said.

Yet there are rarely clear signals about the market. In October 2007, most investors felt safe before the plunge, and at the worst point in March 2009 they imagined disaster, not the 90 percent climb in the stock market that followed.

If a person is many years away from needing the money, and puts a little money from every paycheck into a diversified mixture of stocks and bonds, the dollar cost averaging approach works long term, Ablin said.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis