SEVERE EQUITY LOSSES, 1973-74, 2000-02, 2007- DROPS

The graph shows the three worst stock market crashes since the great depression.

The black (generally on the top) line shows the percent change of the S&P 500 total return index (assumes dividends are reinvested) compared to its peak on January 11, 1973. We see that it did not get back to that level for 3.5 years, and it took over six years before it really got much higher. Keep in mind that inflation was high in the 1970s (remember President Ford's WIN for Whip Inflation Now button?), so even after the total return index recovered all of its losses, there was a loss in purchasing power. This can be seen in the graph of the inflation adjusted Dow on an earlier page.

The blue shows the index itself without taking dividends into account compared to the 1/11/73 peak. Dividend yields were much higher then and generally kept pace with inflation although not with the peak inflation of the late 1970s and early 1980s. Consequently, this line is a better estimate of the change in purchasing power of stocks. Also it may be a better analog to today's low dividend environment. It took 7.5 years, until mid-1980, before the S&P got back to its early 1973 level, and it was two more years before it moved and stayed significantly higher.

The red shows the drop relative to its high on September 1, 2000. (The index itself made highs earlier that year, but almost recovered them so the total return high was on that date.) We see the loss was comparable to the earlier period--nearly half the value. At the end of 2006 it was barely above the high more than six years in the past, which is an anemic rate of return. The drop in 1973-74 was in the middle of the 1966-81 secular bear market. The drop starting in 2000 was at the beginning of a secular bear market.

The S&P climbed higher in 2007 and peaked on October 9 of that year. It fell slowly at first and at pace comparable to the two previous market plunges. In the second half of 2008, it "went over a cliff" and at its low point in March 2009 it had fallen somewhat more and much faster than the two previous periods. That drop since 10/9/07 is shown by the brown line. At the end of 2011, that line is consistent with the other severe drops a little more than four years after and 12% below the prior high value.

The S&P 500 index, which is shown in the graph, is a very good measure of the broad U.S. stock market, but some of the sectors will perform quite differently. High technology is one of those. It is represented significantly in the S&P, but the popular Nasdaq Composite index of stocks that are not formally listed on the major exchanges is much more heavily weighted with technology issues. That sector and the index had incredible gains in 1998 and 1999, which attracted a considerable amount of buying that contributed to the enormous gains. Many retirement plan holders decided that the quickest way to achieve their goals was to load up on technology stocks and ignore the risk reduction that diversification provides. Unless they moved out in a timely manner, these investors' high technology holdings were devasted to a much greater extent than the S&P. The Nasdaq fell by nearly 80% from its highs. Although at one point it had more than doubled its low value in October 2002, at the end of 2008 it is around 70% below its high level in March 2000. That means it must more than triple current levels just to wipe out the losses. Do you think that going to happen anytime soon? I would not be surprised if it takes another decade or longer.

These examples show the real dangers of just buying and holding stocks during a secular bear market. No doubt some retirement plans have been destroyed by what has happened since 2000. In this type of market there is a significant chance that stocks will again fall to or below their late 2002 levels. On the next page, you will see that the standard advice and guidelines provided by the Wall Street mainstream are not likely to solve the problem of reducing the risks to retirement and other plans.

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