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One of the longest Bear markets in history started when the S&P500 hit a peak of 121.74 during January 1973. It touched above this level a few times during 1980 and 1981, but did not make a decisive move to a bear market until 1982. However, even during this terrible bear market investors in the S&P500 index made money.

If you put all of your money into the market on January 2, 1973 (generally, a very bad move) and let all of your dividends re-invest. At the end of 1981 your compounded annual return would have been 1.7%/year. However, if you started an investment program whereby you deposited an equal amount on the first trading day of each year starting in 1973 and maintained this practice through the end of 1981, you would have a compounded annual return of 9.3%.

This sounds pretty good until you consider the effects of inflation. During these years, inflation averaged 9.1%/year. However, the point is you didn't lose money even in a long bear market and you generally will do better with a long term plan of regular investing, even when you start at the top. It is also worthy to note that, even without dividends, the investment grew by well over 1,000% since the start of 1982.

Please understand that as you approach retirement it is increasing important to understand how volatility in the stock market (bond market as well) may affect your savings. There are a wide variety of asset allocation methods that have been proven very successful, but a nice measure for the passive index investor is to keep three to five years outside stocks. Even though the 1973 bear growled for nearly nine years, it hit its low by the end of 1974.

Regards, pmcw
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