Study: Young Investors Should Welcome the Bear

Given that the past decade has been one of the worst ever for stocks, a lot of young investors may be wary of getting involved in equities. Wait until things get better, and then jump into stocks, the logic goes.

But a new study by T. Rowe Price finds that those who begin investing in stocks during bear markets fare far better over the long haul than those who begin investing when the market is headed up — twice as good, in fact.

The study, detailed by T. Rowe Price Group Vice President Christine S. Fahlund for the American Association of Individual Investors ($$), looked at four different investors, who started investing in stocks in 1929, 1950, 1970, and 1979. Each invests $500 a month in a fund indexed to the S&P 500 for 30 years, reinvesting all dividends in the fund.

The two investors who started right before major bull runs produced great returns over the first decade. “However,” Fahlund notes, “they were accumulating fewer shares at a higher average cost during these robust decades. Moreover, their average returns over the next 20 years were much lower than the returns earned over the subsequent 20 years by the other two investors [who started investing right before big bear markets]. Thus, despite their strong starts, their ending balances after 30 years were remarkably less than half that of the two investors who began investing at the start of bear markets.”

Fahlund says this has big implications. “A poor start doesn’t necessarily equate to a smaller nest egg,” she says. “History, indeed, demonstrates just the opposite. Some have questioned whether today’s young investors will ever recover from such steep losses and low account balances. However, our research shows that many who began investing in horrific markets significantly benefited from that over the long run, assuming they maintained their investment program.”

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