Under prevailing economic conditions, a decision to divest of equity investments is understandable and, in some cases, correct. For many investors, retaining an equity exposure is well advised, even if recent results have been discouraging.

Eventually, the market will bottom out, if it hasn’t already done so. How can you tell when the market has hit bottom? You can’t. Only after the fact do analysts look backward and realize that the worst is behind us. Because nobody knows when a market bottom has been attained, investors are encouraged to retain an equity exposure so as to share in the gains that will accrue when the market begins moving upward.

The chart below shows movements of the Standard & Poor’s 500 Composite Stock Price Index in various monthly intervals after past market bottoms when the Index declined by 20 percent or more. As you can see, there were often substantial gains.

There is no guarantee that market volatility will subside after a market bottom, either. After the bear market of early 1947, the market gained 10.8 percent six months later. Yet, three months after that, about 80 percent of that gain evaporated. Three months farther down the road, the market took off and enjoyed a 21.15 percent gain over the bottom, which had occurred just a year earlier.

Then there is our recent experience with the bears, which shows that the market may decline, rebound and then decline again within a relatively short period of time. The market reached a low point on September 21, 2001 and then began moving generally upward. Six months later, the market had gained 19.44 percent. That gain was erased over the following six months, with an additional decline of 13.68 percent by September 21, 2002, from the September 21, 2001 level.

If we could tell when a market bottom has occurred, investing would be easy. But, by the time most of us realize that the worst has passed, we will have missed part of the gain we might have achieved. The only tactic to ensure full participation in market upturns is to stay invested through the lean times. The amount you invest in the equity market should be based on your long-term investment strategy and risk tolerance.

The figures in the chart are no guarantee of future performance. They merely show what has happened in the past. As you can see, the bear market of 2001 led to the bear market of 2002, the only time period in which a market bottom preceded a negative return 12 months later.

*Source: Ned Davis Research, Inc. Study uses NDR-defined Bear Market dates. A Bear Market Bottom is the previous bottom before the start of a Bull Market. A Bull Market requires a 30 percent rise in the Dow Jones Industrial Average after 50 calendar days or a 13 percent rise after 155 calendar days. Reversals of 30 percent in the Value Line Geometric Index since 1965 also qualify. Study is presented using daily price closings. The Standard & Poor's 500 Index is an unmanaged group of stocks considered to be representative of the stock market in general. "Standard & Poor's" and "Standard & Poor's 500 Index" are trademarks of The McGraw-Hill Companies, Inc. The figures shown are not indicative of the returns of any Separate Account investment alternative. Past performance is no guarantee of future results.

The above article is for general information only and is not intended to provide specific advice or recommendations for any individual. Consult your attorney, accountant, or financial or tax advisor with regard to your individual situation.

Mutual of America Life Insurance Company is a Registered Broker-Dealer.