Think Big: This Mega-Bear Will End

Who will be the biggest losers over the next three to five years? Surprisingly enough, it will be investors afraid of losing. Those who squirrel away cash in T-bills or CDs in an effort to get safe are not, in fact, safe. Chances are good that they'll be losers two different ways.

The first way is through diminished buying power. If you accept a 1% to 2% after-tax rate of return in safe investments, chances are good that over the next three to five years, you'll be a net loser after adjusting for inflation.

The second way ultra-cautious investors will lose is brutal -- more likely than not, they're cautious because they've been ravaged by the recent market debacle. They may have lost 50% or more in stocks. And so rather than endure more uncertainty in equities, they've opted out. It's been the biggest "fright flight" in history: After pulling $72 billion from equities in September, $57 billion more came out in the first two weeks in October. These investors will pay dearly, as they'll miss out on likely rebound gains of 50% or 100%.

Context, as they say, is everything. History says that the market doesn't go down and stay down. It has always snapped back, retracing 50% to 100% of the decline within two years of the low.

Since World War II, we've had only two "mega-bear" declines in the Dow Jones Industrial Average -- defined as a slump of 40% or more -- the 1973-1974 drop of 45% and the 2007-2008 decline of 40%.

Investors ran for the hills in 1974. They not only had to watch stock prices plummet, they also saw daily headlines about OPEC's oil embargo, the Watergate scandal, and a spike in inflation to 11%. It's too bad investors were scared out of stocks, because adjusted for dividends, the market retraced the entire decline in two years' time.

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At time of publication, Alsin and/or ACM was long Dell, Tecumseh Products, Boeing and IDT Corp., although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, a California-based investment adviser. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.