Recession provides young investors an opportunity to buy stocks cheap

When the Dow Jones industrial average topped 10,000 this month, you may have let out a sigh of relief.

Finally, the market seemed to be moving in the right direction.

But according to a study this summer by fund company T. Rowe Price, a bear market isn't such a bad thing for a young investor.

Historically, investors who've regularly put money away in recessions ended up doing better in the long run than investors who jumped in during a bull run.

"For young investors, what we've been through is actually to their advantage," said Christine Fahlund, a senior financial planner for T. Rowe Price.

How do you make the best of a bad situation?

Invest regularly

Fahlund said the key is to invest regularly, through payroll deductions to a company retirement plan or monthly contributions to a brokerage or individual retirement account. Making contributions regularly, not through a lump sum, is important.

Fahlund said to think of a bear market as a U. If you invest at the market's peak (the upper left corner of the U) and wait to buy more stocks until a recovery, your money will be worth the same as when you first invested.

You could make a promise to yourself to make another investment near or at the bottom of the U, but following through requires a lot of discipline.

However, if you invest fixed sums every month, you'll automatically buy stocks at lower prices. And because you invest the same amount each month, the number of shares you buy will increase.

The payoff: If the market makes a strong recovery, "the value of those shares could become enormous," Fahlund said.

Be realistic

Investors who saved regularly in extended bear markets have seen big gains. For example, had you put $500 per month into blue-chip U.S. stocks starting in 1929, you'd have accumulated close to $2 million after 30 years.

Contributions in our example total $180,000, so most of the gain is due to good timing: While stock returns were abysmal from 1929 to 1938 (stocks lost an average 0.9 percent annually), from 1950 to 1959 stocks earned an average 19.4 percent per year.

With a deep arsenal of stocks built in the bad years, your savings multiplied as the market turned around.

"If you were to design the world to fit your needs perfectly, you'd have bear markets for decades," Fahlund said. "And then just before you retire we'd zoom into this skyrocketing bull market, and all those shares you accumulated over the years would be worth a fortune."

The one caveat, of course, is that you can't time the market.

Get too optimistic about potential returns, and you're likely to save too little, said Rob Arnott, founder of Research Affiliates, an investment-consulting firm in Newport Beach, Calif.

"The No. 1 mistake investors make is to assume that markets owe them a rate of return that will make up for low savings," Arnott said.

So bear market or not, the only thing to do is to continue socking money away. If you're lucky, "you get to retire better off than ever or earlier than ever," Arnott said.

E-mail Carolyn Bigda at yourmoney@tribune.com.

When is the best time to invest?

According to T. Rowe Price, someone who invested $500 per month in the Standard & Poor's 500 starting in 1929, a definite bear market, had a total return of 960 percent after 30 years.

If a person invested $500 per month in 1950, a bullish time, the return would be less than 400 percent after 30 years.