) -- The six-month bear market that wiped out nearly half of Americans' retirement savings threatens to scare away the class of investor who has the most to gain from it: young people.
Mutual fund manager
T. Rowe Price
(TROW - Get Report)
says in a study that those who began to systematically invest in equities in severe bear markets were "significantly better off 30 years later than investors who began in bull markets."
The analysis charted four hypothetical investors who each contributed $500 a month (15% of a $40,000 annual salary) toward a retirement account that replicated the S&P 500 Index over three decades. The starting date marked a severe stock-market downturn: 1929, 1950, 1970 and 1979.
The four investors were initially hard-hit. The S&P 500, for example, had an annualized return of minus 0.9% from 1929 to 1938, the second-worst 10-year period in history. The benchmark index grew a mere 5.9% in the recessionary era of the 1970s.
But for all four investors, there was good news to go with the bad: They had the opportunity to buy at low prices, accumulating more shares for what would be coming bull markets.
By the end of their first decade, the investors were poised to shake off market drops. The projections built upon 1950 and 1979 showed the greatest success. The S&P 500 returned an annualized 19.4% from 1950 to 1959, and 16.3% from 1979 to 1988, and their nest eggs swelled to $152,359 and $137,370, respectively.