For several years now, Capital Management Report has featured a page entitled "Economic Perspective," which reviews the prevalent economic trends during the previous calendar quarter. The dictionary defines the word "perspective" as "the capacity to view things in their true relations or relative importance." In these early years of the 21st century, we would do well to keep in perspective the performance of the economy and the investment markets in relation to saving for retirement.

The stock market is in the third year of a decline, quite a turnaround from its seemingly unstoppable rise during the mid-to late 1990s. Although equity investors are understandably discouraged, let's put things in perspective. In every year from 1995 to 1999, stocks (as represented by the Standard & Poor's 500 Stock Index) enjoyed investment returns in excess of 20 percent. Allowing for the negative returns that began in 2000, an investment in stocks, left untouched, would still be well ahead for the period 1995 to the present.

But why has the market been so volatile? Some factors include lack of investor confidence caused by a combination of economic events, including the September 11 attacks, deficit government spending, lower corporate profits and increased unemployment. Stock prices surged in the mid-1990s as investors sought perceived investment opportunities among Internet, technology and telecommunications companies. Companies that went public regularly saw their offering prices multiply by factors of two or three one day after trading began. Everyone wanted in. Nobody wanted to be left behind. Magazine articles suggested that early retirement was well within reach for those who played their cards right. The naysayers, those investment veterans old enough to remember the 1970s bear market, cautioned that price-earnings ratios were too high. Newcomers dismissed them. "Everything's different now, the rules have changed," they claimed. Gaining market share was deemed more important than revenue flow.

As bills came due and went unpaid, many of these companies' stock prices were devalued. As long as the market soared, investors' confidence was unaffected by the realities of a bottom line. When doubt crept in, that confidence was undermined.

Confidence has been further shaken in the last year by revelations that several large companies used deceptive accounting practices to keep their stock prices inflated and to allow their senior executives to cash in on lucrative stock options. In addition, the inability of the domestic economy to reverse course decisively, along with the specter of terrorism on American shores, gave investors reasons to avoid stocks.

But that view often presages a market bottom. Experts call it a capitulation; that is, when many investors call it quits and leave the equity arena en masse. Professionals and those who understand the market then materialize and help stabilize the situation.* This is how past market downturns have been resolved.

We wish to emphasize some basic investment principles, which may have lost favor in the frenzied 1990s. Although we can't offer specific recommendations for how you should approach saving for retirement, we do suggest that you adopt a long-term approach in managing your portfolio. And, while the past is no guarantee of the future, the stock market has mirrored the dynamic U.S. economy throughout the 20th century, consistently rewarding investors over time. Equities have been the springboard to a comfortable retirement for millions of people. But bear in mind that with rewards come risks.

Those who invested heavily in just one company or market sector may have forgotten that the stock market can be a risky place. There are likely to be rewards ahead for investors, as technological advances lead to long-term gains for those who invest in enterprises that produce products that improve and sustain our lives. Just as surely, there will be many companies whose products don't pan out. But investors who rely on the basic principles such as diversification and dollar-cost averaging, may find the ride smoother.

We encourage you to have confidence in the American economy's potential. Most of all, we advise you to retain the proper perspective.

* 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.