There is one thing for sure when it comes to Wall Street. There will always be a lot of agenda. We all have agenda. Agenda in itself is not bad. However, it is the type of agenda that only tells you part of the story with the objective of reshaping your beliefs.
Today, Wall Street and everyone associated with Wall Street is working overtime to reinforce to investors that this is nothing but a correction and that the only risk you are taking is the risk created by not just sticking in there for the long-term.
A client sent me an article today that was a prime example of this type of financial writing. After reading the article, I decided that I would change my plans today and talk about this writing. It is entitled, “Bear Market Guide: Stay Calm, Make Money.” The thing that bothers me the most is this article comes from a major financial publication.
The writer’s whole point is that you don’t want to get out of the market for fear of missing the rebound. You just want to stay calm and ride it out. He gives a lot of examples without giving you some of the key assumptions that he is making. Here is his example:
He starts out with an investor questioning the strategy of buy and hold. The person in the example says,” Being in the market feels like gambling now. Not sure that I believe in buy and hold anymore, I wish that I would have gotten out two weeks ago.” The writer’s response is that is the wrong gut reaction.
Let’s take a look at what he is basing that on:
“First of all, it is notoriously tough to get in just before rallies and out before selloffs.
For example, sell out now and you may miss the rebound. In 1974, the Dow Jones Industrial Average plunged 30% in the first nine months of year, only to rebound 16% in October.”
What he doesn’t tell you in the article is that prior to September 1974, the stock market had just dropped -48% over the preceding 21 months. He also didn’t tell you that September 1973 marked THE BOTTOM of that bear market decline.
Let me give you my example. Sam lost -16% from January 1973 to August 1973. If he sold out, he would have missed out on a 10% return over the next two months. However, following that 10% positive return, he would have lost another -44%.
He goes on with another example. “Similarly, stocks jumped 21% in 2003, after three years of big losses.” These are examples of recoveries following long bear markets. Maybe he believes that this is nothing more than a small correction and the problems we are facing are going to disappear into the night. We are only 8 months into this market decline.
Then he goes on to say that stocks “are actually a better deal – maybe even safer – than they were a year ago. And they look exceedingly cheap compared to 1999, the height of the stock market mania.”
What was happening at the end of 1999 is a different type of a risk than what is occurring now. Stocks are definitely cheaper today than they were a year ago. However, that does not make them a better deal if they are going to continue to decline.
Then the article quotes financial planner Harold Evensky, "In hindsight, this is likely to be a buying opportunity. What part of the worst case scenario is not already priced into stocks today?"
Well, that is the million dollar question, my Evensky. It is always the unknown that makes the market drop and there is a huge potential for unknown bad news.
Then he goes onto write, “before you panic over today's headlines and how far stocks could fall, consider the relative health of today's economy. In the early 1970s, economic output was falling. But today, despite the sluggishness, GDP is still inching ahead….Inflation topped 12% in the 1970s and 14% in the early 1980s. Today, it's at 4%.”
I don’t know about you. My costs seem to have gone up much more than 4%. Don’t forget that those stats are very manipulated. Plus in the 70’s a credit and real estate crisis were not occurring at the same time.
Then the most disturbing part is the study that he recites. “A recent study by T. Rowe Price showed that the chances of you running through your retirement savings rose from 13% to nearly 50% if the market increased less than 5% during the first 5 years of retirement.”
The writer adds, “We've been in a bear market for less than a year. So you still have four years to recover.”
Well, if this was 2000, the start of the last bear market, the average return over the next 8 years was 1.8%. Typical bear markets can subtract years from your investments growth.
So what is the take away? Readers look to this publication for advice. This article is written to tell you relax and don’t worry about it. Unfortunately, the writer doesn’t point out his assumptions, which by the way are some very dangerous assumptions.
First, he is assuming that this is going to be a major stock market bottom and everything is going to turn back into a bull market. The average loss in a bear market is -30% and the average duration of all bear markets since 1900 is 405 days. We are only 265 days into this one.
Second, he is assuming that the problems with the real estate and credit markets, as well as inflation, are not going to drastically impact the economy or the stock market.
Third, he is assuming that the risk of the current environment is not even close to the risk in 2000 or in the 70’s. I would suggest that the risk we face today is greater.
Finally, he is making the assumption that you are perfectly fine in stocks. That isn’t always the case.
The financial services industry would love more than anything for you just to sit tight and take the losses. They are not making money if you are not invested.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
