This country's economic crisis has all of us wondering what the future holds. Will President-elect Barack Obama be able to reinvigorate the economy? When will the housing market rebound? How is the holiday season going to play out in terms of retail sales? For months, economists have been debating these issues. After all, that's a big part of their job. But for the average investor, it might be better to focus on the past. I'm not talking about the last couple of years; rather, I'm talking about the past couple hundred years. We can learn a lot from the historical ups and downs of the stock market.
"If you look at over two centuries of American history, bull and bear markets are a fact. The market does fluctuate, usually over decades. So roughly, you're talking about a decade up and a decade down," says Richard Sylla, a professor of economics at NYU's Stern School of Business who focuses on the history of the markets. Everyone knows what sort of decade we're experiencing now, which means that in a few years, things should start looking a bit brighter. Economists are largely in agreement on this fact. But how do you cope in the meantime?
Knowledge is powerThis quick look at the market's history is just the tip of the iceberg. I'm not saying you should devote a great deal of time to research, but knowing where the economy has been can go a long way in making you feel more at ease during this recent low point. "Fear is going to control you unless you educate yourself on what's happening. It's having no understanding that makes people completely freaked out," says motivational speaker Tony Robbins.
According to Sylla, if you go back 200 years and average the market's returns, there have been about ten movements like the one we're experiencing now, meaning the full cycle of up and down takes roughly 20 years. Makes sense, right? The 1990s were extremely strong, and this decade has been anything but.
Put it in perspective"In every 80-100 year period of time, we have cycles, or seasons. They come like clockwork, but we forget them," explains Robbins. The Great Depression of 1929 was a dark and dreary time — in other words, a winter. When people finally came out of that, they entered spring. The market started blossoming again, there were opportunities to make money and people were generally optimistic. Right now, Robbins says, we're once again experiencing a winter, but we don't have to be dark and dreary about it. "Winter can be one of the best times of your life, financially, if you don't panic." Take the advantageBy "don't panic," Robbins, in part, means don't pull your long-term money out of the stock market. Let's get something straight: If you have money that you're going to need in the next five years — money to send your kids to college, buy a house or go on a vacation — it should not be in the market. There is too much risk involved and it might not be there when you need it. But if you're saving for a long-term goal, like retirement, your dwindling 401(k) balance is not a reason to pull out. In fact, it could even be a reason to invest because you have an opportunity to buy low. "Right now we're down for the decade, and most people ought to be thinking that it's been terrible, but the next decade will be better. Unfortunately, most people are concluding the opposite now. Really, the market is more and more attractive," says Sylla. Invest wiselyNow, more than ever, you need to make sure you have an emergency fund that can cover six months' worth of expenses. People are getting laid off every day, and if you're next, at least you'll be prepared. Credit cards — not that they were ever the ideal way to float through an emergency — are no longer reliable because people are seeing their limits cut all the time. If you're set there, you should take any extra cash that's earmarked for the long term and put it in the market. Don't do it all at once, but on a regular basis, like every few months. If you spread it out over the next year or so, you're more likely to get a good average price, says Sylla. "History indicates that investments made at today's prices will look good in five to ten years." Stay occupiedWatching your investments can really do more harm than good — it makes you anxious, which can in turn cause you to panic and do something you'll later regret. Instead, turn your attention to other areas of your life. This is a great time to tackle a big project at work, lose those last five pounds, or read a good book.
With reporting by Arielle McGowen.
Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, .