Stocks are risky. As if anyone with a retirement savings plan doesn’t know that already. The stock market is down 35 to 75 percent since the peak, depending on the index. The three-year long bear market ranks among one of the worst on record—and it isn’t over yet. But now for some really bad news: Assuming an 8 percent compound price growth, investors who bought the Standard & Poor’s 500 index at the peak will not see similar levels until 2010. The NASDAQ? According to calculations by quantitative analysts at Morgan Stanley, not until 2020. No wonder the investing public is skeptical of the 1990s mantra that stocks are the place for long-term savings and that dollar cost averaging is a strategy for all markets. Many investors are cutting back on their stock holdings or dumping equities altogether. Stock funds suffered their first yearly outflow since 1988 last year. Fixed income securities, such as money market mutual funds, certificates of deposit, and bonds, are the favored investment. My concern is that angry investors are taking away the wrong lessons from the bear market. The main lesson is the benefit of diversification. Yes, the Wilshire 5000 stock market index is down a cumulative -37 percent since the end of 1999. But the Lehman Brothers aggregate bond index has returned 34 percent over the same time period. Dollar-cost-averaging is also a sound strategy for buying low if not selling high. Sure, the 10-year expected return of anyone who invested his or her money at the market’s peak is zero. But investors in retirement savings plans have been buying shares at lower prices throughout the downturn. With dollar-cost-averaging, savers own more shares at a lower overall price. They should enjoy decent returns going forward. Stocks should still outperform bonds over the long run for a simple reason: As I said at the beginning, stocks are risky. Look at it this way. Bondholders have arranged to be paid first. Equities are the far less certain returns to entrepreneurship, management savvy, and worker productivity. "Stocks are investments in America," says Ross Levin, president of Accredited Investors, "bonds are loans to America. Stocks are investments in corporations; bonds are loans to corporations." Of course, no one knows by how much stocks will do better than bonds. My own guesstimate is that a reasonable return estimate for equities is 4 percent to 6 percent a year, after inflation. Bonds will come in a percentage point or two under that figure. And, by the way, 5 percent or so after inflation is nothing to sneer at.

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