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Mediocre savers get rude awakening

The Baltimore Sun

Investors who thought they could count on the stock market to make up for the mediocre savings they have socked away in 401(k)s and IRAs are having an awakening.

And it's not a happy one.

For eight years now, the stock market hasn't co-operated. Instead of providing the 15-percent-a-year returns people enjoyed in the 1990s, the market has turned into a Scrooge.

Not only hasn't the stock market lived up to its historical average of 10 percent annual returns, but the benchmark Standard & Poor's 500 stock market index stands significantly lower today than it did at the start of the decade. Two weeks ago, with investors worried about plunging home prices and surging oil - the S&P; 500 fell below 1,400. That was well beneath the 1,469 at the start of 2000, and far below the 1,527 peak in the index March 24, 2000, the turning point in the technology stock craze.

"It's a lost decade," said Howard Silverblatt, an S&P; 500 index analyst. Even with the dividends that the 500 large stocks in the index pay, investors have earned 0.6 percent on average annually, he said.

There has not been a decade this bad for investors since the Great Depression. During the 1930s, investors lost 5.6 percent annually, Silverblatt said.

And the next worst period in history - the 1970s - gave investors a 1.6 percent annual return, he said. The decade began like the 2000s, with elation over a group of stocks that were presumed to be good investments at any cost. The Nifty Fifty stocks, including Polaroid and Avon, skyrocketed and crashed. And the stock market took more than seven years to recover..

The 2000s began with elation over technology stocks and resulted in a 49 percent drop in the S&P; 500 when investors discovered they grossly overpaid for them. Just as the market was about to recover from that mania, it suffered a shock from another mania - the housing craze.

Whenever investors push investments to exorbitant prices, there is a lengthy period of adjustment later.

Still, investors might not be as bad off as they have assumed.

While they might see disappointing numbers if they focus on an S&P; 500 index fund, investors who used a mixture of investments did significantly better.

"The 2000s have been the poster child for diversification," said Michele Gambera, Ibbotson Associates chief economist. "Each major class outpaced the Standard & Poor's 500." An investor who would have assembled a classic portfolio, with 60 percent invested in the S&P; 500 and 40 percent in a broadly diversified bond fund that mimicked the Lehman U.S. Aggregate index, would have turned $1 invested Dec. 31, 1999, into $1.32 at the end of last month, Gambera noted. The simple portfolio would have grown about 32 percent.

An investor who assembled a more elaborate mixture did even better. With 30 percent invested in the large stocks of the S&P; 500, 10 percent invested in the small stocks of the Russell 2000 index, 20 percent invested in the MSCI EAFE developed countries international stock index, 30 percent in the Lehman bond market index and 10 percent in cash equivalents, an investor would have turned $1 into $1.44, Gambera said.

Investors don't have to assemble complex portfolios on their own. Rather, Gambera said, they can buy target date funds in which a fund manager combines diverse stock and bond investments in proportions geared to preparing a person to retire on a certain date.

Gail MarksJarvis is a Your Money columnist.

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