Almost all retirement (and other investments for that matter) accounts hold a significant portion in stocks because over longer period of time they have risen and outperformed the alternatives usually available for such accounts. The "standard" guidance provided is just to buy and hold stocks, possibly making periodic additions as new deposits are made, because in the "long run" stocks always do well. John Maynard Keynes cynically, but correctly, observed that "in the long run we are all dead," but that is not really helpful. However, it does make the point that depending on individual financial positions, retirement plans, age, and other factors, long run stock performance may not be relevant if severe losses reduce equity enough to ruin these plans and there is not enough time for the longer term performance of stocks to recover the lost equity.

In simplest terms, money that will be needed within a few years, say three to five, should not be in stocks regardless of market conditions. In a secular bear market, which we are in now, (see prior page) it can take quite a number of years to recover the losses and see one's equity increase. That means the dangers of investing in stocks, particularly for those who have retired or want to do so in ten or even fifteen years, are very real.

The table shows the major "drawdowns" in S&P 500 total return (includes dividends, which are assumed to be reinvested) since 1966. Low cost index funds or the exchange traded "Spiders" will have approximately the same performance as the S&P total return. Other types of stock investments likely will perform differently. The purpose of the table is to illustrate the risks from holding stocks for short periods of time and to contrast these risks between bull and bear markets. By years, the last full secular bear market was in 1966-81, the following secular bull market lasted from 1982 through 1999, and 2000 saw the start of the current secular bear market.

Major Drawdowns in the S&P 500 total return index
Secular bear market: 1966-81 Peak date Lowest Point Recovery date Time until prior high hit again 9 Feb 1966 -20.4% 23 Mar 1967 1 year, 1.5 months 6 Dec 1968 -32.8% 15 Mar 1971 2 years, 3 months 11 Jan 1973 -44.9% 9 Jul 1976 3.5 years (see note below) 31 Dec 1976 -14.5% 6 Jun 1978 1.5 years 28 Nov 1980 -19.9% 7 Oct 1982 almost 2 years Note: In the 1970s dividend yields were much higher than they are now. In terms of the S&P 500 index itself, which may be a better guide to today's market, the early 1973 high was not reached again until July 1980, a period of 7.5 years. That shows the great danger of buying and holding stocks during a secular bear market. Secular bull market: 1982-99 Peak date Lowest Point Recovery date Time until prior high hit again 10 Oct 1983 -11.3% 21 Aug 1984 10+ months 25 Aug 1987 -32.9% 17 May 1989 1 year, 9 months 16 Jul 1990 -19.2% 11 Feb 1991 not quite 7 months 17 Jul 1998 -19.2% 23 Nov 1998 4+ months 16 Jul 1999 -11.8% 16 Nov 1999 4 months Secular bear market: 2000-? Peak date Lowest Point Recovery date Time until prior high hit again 1 Sep 2000 -47.4% 25 OCT 2006 6 years, 1.75 months 9 Oct 2007 -55.3% 4.25 years and counting (at end of 2011 needs to rise over 13% to get back to 2007 high)

The contrast between the two types of markets is startling. Even the at the time panic inducing crash on October 19, 1987 (over a 20% drop in one day) can be seen now to be part of a drop that was not nearly as bad as those that began in January 1973, in September 2000, and October 2007. There was an 7.5 year period from early 1991 until mid-1998 when there were no significant drawdowns (over 10% and taking at least 4 months to recover).

There are many stories about those who in early 2000 had planned to retire in a year or two, but due the losses in the stock market--and given the great bull market until then, many were too heavily into stocks at that point--they had to keep working and now have no idea when they might retire. Similar stories were heard in 2007 and 2008 following the four plus year cyclical bull market. Some of the stories may be wishful thinking in hindsight. However, anyone who has the needed funds to retire in a couple of years and wants to do so is foolish to risk their plans by staying in the stock market if any sort of signifiant losses will result in insufficient wealth to retire. (Bill Gates and Warren Buffett, among others, don't have to worry about losing money in stocks, but the rest of us do.)

On the next page, we take a closer look at the drops in 1973-74, 2000-02 that eroded almost half of stocks value, and the current plunge which has been even worse.

Next page: closer look at the worst drops

Previous page: secular bear and bull markets

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