Three Myths of Market Underperformance
Dan Richards*
February 10, 2009

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The human propensity to gravitate towards evidence supporting existing biases is one of the most important lessons of behavioral finance.

What that means, quite simply, is that in buoyant markets, investors are prone to believe outrageous claims by market bulls – think no further than “the world has changed forever” rhetoric and best selling books like “Dow Jones 36,000” and Harry Dent’s “The Great Boom Ahead,”  during the technology bubble of the last decade. 

In the same way, in negative markets such as we’re experiencing right now, investors tend to believe even the gloomiest assertions from “media gurus” and self appointed experts.  A recent New York Times article headlined “Forecasters race to call the bottom to the market” discussed the competition among market pundits to come up with the direst possible predictions.

Jumping on this bandwagon is the same Harry Dent, who just published “The Great Depression Ahead.

Most members of the media strive for accuracy in their reporting and work very hard to get the facts right.  Unfortunately, many of the assertions getting the highest profile are based on flawed analysis of past stock market performance.  Pundits who distort history to get media coverage for their alarmist claims and well-meaning commentators who quite simply get the facts wrong are usually the culprits.

The only way for advisors to combat this misinformation is by presenting the true facts.

Among the common misleading claims about investing in the stock market recently espoused in the media are the following:

  1. Investors made no money in the market from the mid 60s to early 80s.
  2. It took 25 years for the market to recover to the level reached in 1929.
  3. When inflation is taken into account, investors lost money for long periods of time.
Dealing with these claims requires advisors to beef up their arsenal of knowledge of historical performance and add resources with detailed data to their library.  Here’s some ammunition to get you started.
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