Stock Market MythBuster

You’ve heard the myths before:

  • “On average, the stock market returns 10% a year.”
  • “Stocks will outperform anything else over the long-term.”
  • “The market’s very cheap right now (P/E ratio); it’s a great time to buy in.” And (my favorite)
  • “You’ll be fine with a diversified portfolio of mutual funds.”

Do you really believe the above points? I mean how long can these “facts” float around our industry before someone calls them out? The 10% market return myth is the most commonly circulated. So I’ll ask you, how many of your clients really returned over 10% the past decade? The past 2 decades? And is that gross or net of fees? Anyone can backcast numbers and make them look any way they want. But what do you see from client statements sliding across your desk?
For the sake of time, I’ll skip over points two and three, even though they’re just as far-fetched. But before leaving these points entirely – a word of note on point four, “you’ll be fine with a diversified portfolio of mutual funds.” A diversified portfolio of mutual funds? That’s like saying I have a diversified classic car collection. Then opening up my garage I show you a green Chevy, a blue Chevy, a red Chevy and a black Chevy. Wow…look at how amazingly different these shiny vehicles are! All of us know you can invest in mutual funds focused on different cap sectors, growth strategies, etc. But the chassis remains the same. They’re risk-based, upside-hopeful, downside-vulnerable, fee charging mutual funds! You can see my blue Chevy is different from my red Chevy. But is that an accurate definition of diversified?!?

The Wall Street Journal published an article last year titled Ten Stock-Market Myths That Just Won’t Die, summarizing the most common misconceptions about the stock market. The truth remains (and always will be that) we simply cannot predict how markets will perform. What we do know is, historically speaking, markets tend to be cyclical. Instead of a market we look at as “just performing well over the long run”, we’d be much better seeing the stock market as broken up into a series of bull and bear periods. The chart below shows the historical trends of the Dow Jones over the past 113 years.

At first glance, 113 Dow Jones history is made up of 4 cycles – each consisting of bull period immediately followed by bear period. The timing has gone:

  • 9 year bull, 18 year bear (2:1)
  • 5 year bull, 25 year bear (5:1)
  • 11 year bull, 17 year bear (1.5:1)
  • 17 year bull, 10 year bear (1.7:1).

What does this chart really mean to you? And to clients? The first question you should be asking retirees is “Given the state of our economy and national fiscal policies, do you think we’re currently experiencing one of the shortest or one of the longest bear markets in our country’s history? Does it feel like we’re out of the woods yet?”
With previous bear markets lasting 18, 25 and 17 year respectively; most professionals and retirees would say there’s plenty more to follow today. And as new (baby-boomer) retirees begin drawing lifetime income during a bear market cycle, their portfolio will be much less likely to survive than if income was drawn during a bull cycle. As a retiree in one of the most volatile and uncertain economic periods on record, why would they take that chance? Why would they insure their home, car and life – but go high-stakes gambling with retirement savings they’ve spent 30, 40 or 50 years building? Considering the available solutions that offer contractually guaranteed income streams that don’t require client gambling, I don’t get it. I’m always open to feedback. But as I see it today, financial advisors suggesting a “market based solution” either (1) don’t know or (2) don’t care. Let’s hope it’s the first.

Post a comment below if you’d use a copy of the Dow Jones chart with clients. But if you’re stuck on one of the market myths above, this probably isn’t for you…
Happy selling. ~ MJN

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