If you were diversified, you should have weathered the recession OK

The Dow Jones industrial average on Wednesday briefly topped 12,000, a level not seen since June 2008. Individuals, gun-shy about stocks during the past couple of years, are wondering whether they dare to indulge again.

With the broad stock market up about 98 percent from the fearsome point in March 2009 that set off a stampede to the exits, some find stocks tempting. Yet, the memory of 401(k)s turning into 201(k)s still plays on people's nerves. They fear adding money just in time to take another thrashing.

What to do?

Some research, provided by Morningstar's Ibbotson Associates, provides a fascinating look at the roller-coaster ride many individual investors have endured over the past few years, and it offers an important lesson about diversification: It was possible to have survived the worst bear market since the Great Depression and come out of it fairly well with the right combination of stocks and bonds.

But first, understand that many people already have made a decision about what to do. The more-daring investors among us added about $3.6 billion to stock mutual funds in January, according to TrimTabs, a firm that tracks the flow of money. Analysts see the trickle back into the market as confirmation that individuals will return to investing after their bout of disgust and fear.

Still, while the flow into stock funds seems to defy the trend of the past two years, when investors yanked $108 billion from U.S. stock funds and poured $640 billion into bond funds, Charles Biderman, chief executive of TrimTabs, isn't sure individual investors have found their courage yet.

"The bulls all say money should start coming in now, but Mom and Pop don't put new money in when they are still at a loss position," he said.

And they are still at a loss. The full stock market of large and small U.S. stocks, measured by the Wilshire 5000 index, remains down about 14 percent from its high, and investors collectively still have not regained $2.8 trillion of the money they had before the market started sliding in October 2007.

But for those scared yet tempted, a look at the round trip investors have traveled during the bear market might be comforting.

Although relying on stocks alone was a dangerous approach that ravaged retirement savings, the journey from the security of 2007 to the dread of early 2009 and finally an upbeat ending to 2010 should be somewhat reassuring. The research from Ibbotson Associates shows that even if a person had no idea when to flee or enter the stock market, many people avoided the long-term disaster they might have imagined amid the financial crisis.

First, the worst-case scenario. The person who was 100 percent invested in stocks has been damaged, with too many baby boomers close to retirement among them. An individual with $10,000 in stocks in 2007, just before the market started dropping, would have had just $4,900 as March 2009 began, Ibbotson said. With the market's recovery, that person would have had $8,860 at the end of the 2010. Nothing to cheer about, but some significant healing.

So what about the person who wasn't blindsided by the stock lovefest of the past decade?

If a person had divided his or her money half in stocks and half in bonds, the bonds would have provided the buffer they are intended to provide in awful times. That $10,000 investment would have fallen to $8,100 at the worst point in the downturn in March 2009. But by the end of last year, the portfolio had fully recovered: The original $10,000 grew to $11,385 by the end of 2010. That's a 14 percent gain.

Even people taking greater risks would be back to even. The investor who had 70 percent in stocks and 30 percent in bonds, as some advisers suggest for the typical 40-year-old, would have $10,540 at the end of 2010. That's a 5 percent return over a couple of years, not great for that length of time but not a complete disaster.

And the daring investor who kept 80 percent in stocks and 20 percent in bonds ended 2010 whole again, with roughly $10,035.

Now, analysts and fund managers argue each day, sometimes in this column, about whether it is safe to invest now. Some, such as Jeremy Grantham, are alarmed at how fast the stock market has climbed and warn investors to "be aware that you are living on borrowed time as a bull." Others, such as David Kostin, of Goldman Sachs, are expecting the stock market to climb 19 percent this year.

But here's the moral of the story: If you can get through the worst bear market since the Depression with a combination of stocks and bonds, maybe you don't have to worry day in and day out about the prognostications.

Gail MarksJarvis is a personal finance columnist for the Chicago Tribune.

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