Do Stock Prices Rise More Often Than They Fall? The Client “Approved” Piece

Last week, I wrote about an email that I received from a mutual fund company. When the stock market is experiencing difficulty, the mutual fund industry is working overtime to make sure that financial advisors know what to say to clients.

I call it the hand-holding process. The mutual fund industry holds the advisor’s hand and the advisor holds the hand of the client, assuring the client that everything will be just fine. The last thing either wants is for the client to sell and get out of the market.

You get the clichés of “we are in it for the long-term,” “you always buy and hold,” “the market always comes back,” “stocks are the greatest long-term investment,” etc.

Well, my weekly email came today and now they have a “client approved” piece that advisors can send out to their clients that illustrates the point that stock prices rise more often than they fall. If you will recall, the whole concept is that since 1896 stocks have had 72 positive years and 39 negative years. The conclusion is that the good outweighs the bad. Of course, if you read my blog, you would see the other side of that statistic.

Let’s take a look at this “hand-holding” piece.

“If they (investors) resist the panic sell, investors have historically been rewarded for their patience as stock prices rallied amid rough economic periods.” They appeal to the investors since the long-term and that history is on their side.

Then they use examples of economic downturns in the summer of 1981 and the downturn between July 1990 and March 1991. In both examples, the market came roaring back.

Of course, the downturn in 1981 was at the tail-end of a 17-year long-term bear market. Stocks were ready to take off. In July 1990, we saw a very mild contraction in the economy with the stock market right in the middle of one of the greatest bull markets on record. So, these are some pretty good cherry-picked examples showing that it didn’t make sense to sell.

Today, we are in the midst of a serious credit crunch that is starting to affect all aspects of our economy. We are also facing a major real estate crisis that is seeing foreclosures skyrocket. We are in what looks like a consumer led recession. These types of recessions can last a lot longer than one can imagine. In other words, risk is very high for stocks. The mutual fund company wants to lull you to sleep with these historical facts, making you think that it makes sense to take risk. Remember, it is best for the industry if you stay put.

It only makes sense to take a lot of risk when there is the probability of a lot of reward.

They end the piece with an illustration showing all of the positive years and the smaller number of negative years. What they don’t tell you in that hand-holding piece is that it takes all of that green to make up for the little bit of red. Don’t let the hand-holding put you to sleep. Know your risk!

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