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History makes a great teacher. But if you only pay attention to part of what's happened in the past, you won't learn from history -- and you'll draw the wrong conclusions about what to do next.

Right now, the stock market has thrown investors for a loop. Instead of delivering typical historical returns, it has taken a huge bite out of many people's life savings. Yet that doesn't mean stocks will drop forever -- or that you should expect to reach your financial goals without them.

A tale of two markets
For 25 years, the stock market paid extraordinary returns to investors. As they became accustomed to those outsized payouts, investors who had known nothing but good times came to believe that long periods of nearly uninterrupted advances in stock prices were inevitable. Certainly, down markets like the 1987 market crash and the bear market of 2000-02 punctuated those bull runs -- but overall, they were merely blips in comparison to the length and magnitude of the market's upward moves.

Then came 2007 and the beginning of a set of conditions that many active investors haven't seen before. Only those who survived the oil-spurred stock selling of 1973-74 have a realistic frame of reference to work from -- and even seasoned veterans have said that the current troubles pose a much greater threat.

Going to extremes
It's clear that no matter how well you may believe you grasp the stock market’s mechanics, you can't get a true understanding of bull and bear markets until you experience them personally. As a result, the era in which you first get exposed to investing plays a pivotal role in defining how you invest.

Once defined, changing your investing strategy takes a lot of work. Consider, for instance, survivors of the Great Depression. Many of you probably have parents or grandparents who saw stocks fall 90% and more and languish for the better part of a decade -- and who essentially swore off stocks for good. Settling for bonds and other low-yielding investments instead, they likely wouldn't have been able to retire comfortably without the support of company pensions to bridge the gaps in their retirement income.

In avoiding stocks, many in an entire generation of investors gave up what proved to be an equally extraordinary time of strong performance in the markets. And although they may look like geniuses now, many might well have done better investing in stocks, even taking into account the losses in the past year. Consider, for instance, this 35-year track record for some large well-known names.


35-Year Average Annual Return

Alcoa (NYSE: AA  )


DuPont (NYSE: DD  )




Caterpillar (NYSE: CAT  )


McDonald's (NYSE: MCD  )


Procter & Gamble (NYSE: PG  )


Wal-Mart (NYSE: WMT  )


Source: Yahoo! Finance.

Sure, with many of these stocks, you would've been much better off if you'd gotten out last year. But over time, most stocks still paid a decent return -- as they have over longer periods of time, even when you include the painful years of the Great Depression.

Teach others well
It's entirely possible that without any other guidance, a new young generation of up-and-coming investors will conclude from recent events that investing in stocks is like throwing your money away. Although that may seem prudent right now, in the long run, it's more important than ever to keep at least some stock exposure within your financial plan for all but the most vital of purposes.

With your help, we can make sure today's children get that message. This year's Foolanthropy campaign supports DonorsChoose, whose primary mission is to give youth the fundamental foundation of financial knowledge that everyone needs in order to manage their money successfully.

From now until Jan. 15, the Fool is giving $0.02 to DonorsChoose every time you post a new discussion-board message. So keep talking and learning from the folks on the Fool's discussion boards, all the while knowing that by doing so, you're doing a small part to advance the cause of financial literacy throughout the U.S. and abroad.

Whether you give or not, however, don't make the mistake of believing just one part of stock market history. Just as bull markets don't last forever, bear markets aren't as endless as you may think right now.

For more on Foolanthropy:

Fool contributor Dan Caplinger won't let the bear keep him from his financial dreams. He doesn't own shares of the companies mentioned. Wal-Mart is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy gives back to you.

Read/Post Comments (1) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 15, 2008, at 11:03 PM, Tak3natheFlood wrote:

    I'm 21 I started investing 3 years ago and I plan on using stocks to build wealth as they have for so many before myself. Time is clearly my greatest ally. It would also only be beneficial if investing became really popular just as I am about to retire about 45 years from now. Then again I could be one of those energizer bunnies like Warren Buffett who just loves work and won't need to retire anyways. Cheers!

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Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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