A double dip could destroy investor confidence for years.
These are anxious times for investors, who are feeling their newfound confidence retreat along with the gains of recent weeks.
These are also anxious times for financial writers like myself, who have been sticking to their guns by claiming stock markets are still one of the best ways of building long-term wealth.
Because if the benchmark FTSE 100 index continues its slide of recent days, and even sinks below 4,000, there are going to be a lot of disillusioned people out there. And it could be a long, long time before they sally forth into the stock market again.
A trash and bull story
Many private investors were recently tempted back into equities in the hope of cashing in on the dash for trash, and catching the next bull market at the earliest opportunity. They will also have been hungry to recoup at least some of their losses from the recent crash.
But many are likely to have missed the rebound, and are instead in for a second dose of disillusion as markets sink again. The danger is that they decide the pain of equities is no longer worth the potential gain and give up on them for good.
They may also say "Bah!" to people like me, who claim they should still invest in stocks and shares, and dump their money into a humdrum savings account where it isn't going to get hurt. And we will have lost a whole generation of Foolish investors.
Throwing money away
I wrote an article on pensions for lovemoney.com a few weeks ago, and received a disconcerting message from a member. She said her daughter had followed the advice of people like me, paid £100 a month into a pension fund over the last year, and seen her total £1,200 investment halve to £600.
This was her daughter's first year of pension saving, and she felt like she had thrown her money away. How am I supposed to convince them that saving for a pension is really such a good idea? she asked. It's a damn good question.
Dash for cash
I can see why, like so many investors, our young pensions saver is so disillusioned. Investing in equities, even through a collective fund such as a pension, is risky. It isn't for everybody. Those who liken it to gambling aren't far wrong.
But name me a better alternative. Saving the money in cash will do little more than keep your pot one step ahead of inflation, and in many cases won't even do that. People who put all their faith in property have taken an equally brutal beating as investors.
If you want to significantly grow your money, you have to take that chance on stock markets. Unfortunately, they haven't delivered in the last decade. But as every investor knows, past performance is no guide to future returns.
So just because we have had a lousy 10 years, doesn't mean the next 10 will be equally bad. And our young pensions saver is lucky, because she has time on her side.
Darkest before the dawn
These are dark times for stock markets (and writers who still advocate them), but they won't last forever. One day, the current lows will look like an excellent buying opportunity for the shrinking band of investors who had the stomach for it.
Taking a chance in the bad times really can pay off, as we saw as recently as March. That recovery was a short-term rebound, which no investor can plan for (although we can still enjoy).
The proper way to invest in equities is steadily over 10, 20 or 30 years, which allows us to view any short-term setbacks with a long-term perspective.
Generation why?
My worry is that the lost generation of investors will only return to equities as the next bull market nears its peak. They will (rightly) kick themselves for missing out on years of strong returns, and start buying up stocks just as they start to look toppy.
So don't abandon all hope today, because you might rediscover it at exactly the wrong time.
Keep the faith
My advice is to keep the faith, tuck into some cheap stocks, assemble a balanced portfolio of equities, bonds, cash and property, and stick around for the long-term.
These are anxious times, but confidence will eventually return, it always does. Stock markets could take years to fully recover, but when they do, they will move quickly and without warning.
So start positioning yourself now to take advantage.
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