My fear is that many may now shun stocks forever. The percentage of American households investing in stocks already had fallen from a peak of 57 percent in 2001 to 47 percent early last year, according to a study in February and March 2008 by the Investment Company Institute and the Securities Industry and Financial Markets Association, both industry groups. The bear market that lasted until 2002 likely contributed to Americans' lower appetite for risk, the study said.
I expect last year's market drop will lower this appetite further as future 10-year returns will look lousy for years. Even if stocks gain 10 percent a year for the next nine years, the average annual compounded return for the 10-year period ending Dec. 31, 2017, would be only about 4 percent.
And yet -- again historically, but with no guarantees -- strong market gains tend to follow periods of declines. Provided their total allocation to stocks does not exceed their risk tolerance, investors may consider dollar-cost-averaging now, or investing equal amounts of money at set intervals. That way they use volatility to their advantage, buying more shares when prices are down.