Investors Who Kept the Faith Are Rewarded

Free-market capitalism isn't such an obsolete institution after all.

Investors who kept their faith in America's economic system were handsomely rewarded in the third quarter, which ends today. Diversified U.S. stock funds posted a return of nearly 15 percent during the past three months and are up roughly 22 percent for the year.

Since most 401(k) retirement portfolios of American workers are invested in such funds, the quarter continued to bring some pretty good news to average investors.

At least it did to those who ignored the doomsday declarations 18 months ago when the markets suffered a dramatic collapse. Capitalism's enemies seized on the steep fall — at one point, the Dow Jones average was down nearly 40 percent from its high — as evidence that the system was fundamentally broken and not likely to recover.

Older workers, they moaned, would have to forget about retiring.

And younger workers, they said, would have to stake their futures on something other than market investments — big new government programs, most likely.

The pundits were certain that it would take many years — decades, perhaps — for investors to recover from the blow.

And here we are, less than two years later, and the markets are enjoying some of their biggest quarterly gains in more than a decade and already recovering more than half of what was lost. Those who were panicked by the pessimists into dumping their stocks and bonds are no doubt kicking themselves.

What we learned from this is that acceptance of volatility is an essential part of investing. Risk and reward go hand-in-hand.

Obviously, the market could turn downward again at anytime. That's its nature, and Americans got in trouble when they forgot that stocks go down as well as up.

But for the long term, the U.S. stock and bond markets still offer the best opportunity for an open-eyed investor to make some meaningful money.

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