By Don Schreiber Jr.

Clients and financial advisors alike are shell shocked by the accelerating declines in the equity markets. If the events of the last few years weren't enough to demolish their confidence, the 20-plus percent declines in the stock market averages last year will cause many investors to abandon their strategies to try to conserve the little capital they have left. To make matters worse, panicked advisors don't know what to recommend to their clients.

Now is the time when your clients need your reassurance and professionalism the most to refocus on the basics of investing and to help prevent them from repeating the losers' game of buying high and selling low.

The stock market has provided investors with more than a 10 percent average rate of return over the past 100 years. This includes all the declines we have experienced, including the market crash at the start of the Great Depression and the Y2K bear market.

The market goes up more often than it goes down. Over the past 100 years, the market has advanced 64 percent of the time. After every bear market decline, the market has not only recovered, but the ensuing bull market surge has been astounding.

The only way for clients to catch the next bull market performance surge is to stay invested and not abandon their investment plan.

After every bear market decline, the market has not only recovered, but the ensuing bull market surge has been astounding.

A history
History repeats itself and, unfortunately, so does investor behavior. It is up to advisors to make sure clients don't make the same mistake of selling low.

You can share with your clients the following history of the Dow Jones Industrial Average since 1900, concentrating on the performance periods that transpired before, during and after the Depression. Then you can illustrate the high correlation between the Depression bear market and the 2000 bear market that followed the bursting of the financial bubble of the 1990s.

Take a look at the performance period that led up to the collapse of the markets during the Depression. From 1924 to 1928, the economy and the markets were in a boom that was fondly termed the Roaring '20s. They were great times for investors, who were rewarded handsomely for taking the risks inherent in investing rather than saving their money. The Roaring '20s bull market soared to never-before-seen heights and provided exceptional returns year after year until that bubble market finally burst in October of 1929.

The closing value of the Dow in 1928 was 300. As overvalued markets unraveled, investors fled in droves, selling their holdings to conserve capital, and this accelerated the market's decline. The collapse that began in 1929 continued for four years. As it turned out, this bear market took on grizzly-bear proportions with the Dow closing at a value of 59.9 at the end of 1932. The Dow actually hit a low point of 40 in 1932, a level not seen since 1896 when the Dow closed the year at 40.45.

The Depression bear market had effectively erased 36 years of hard-won market performance. No one escaped getting mauled by the grizzly declines of the Great Depression. Investors worldwide were stunned and sickened by the 80 percent decline in value. These investors were the first in a long line of 20th Century investors to play the losers game, buying high as bull market returns made investing look easy, and selling low, panicking in the face of the bear market. Who could blame investors for buying high? They were drawn into the market after witnessing year after year of high bull market returns. The average change in value of the Dow from 1925 to 1928 was 26.7 percent.

Losers' game
Investor experience validated the easy money to be made without the possibility of losing invested capital. This led investors to ignore the warning signs of overvaluation and high volatility, and they rushed to buy stocks at or near market highs. Unfortunately, they then ended the losers' game by selling their holdings at or near the bear-market bottom. Most investors vowed to never repeat their money-losing investment experiences, and they swore off investing in the stock market forever. Doesn't this sound familiar?

Investors back then were not yet positioned to take advantage of the performance surge in the markets that started in 1933. The Dow soared 66 percent and closed the year at 99.9. From the depths of the bear market in 1932, when the market hit a low of 40, the Dow had gained 150 percent.

This performance surge continued unabated for the next three years, stacking high return upon high return, lifting the Dow to a closing value of 179.9 at the end of 1936. The problem was, investors did not stay invested or get back into the market. They were by then shattered by the losses of the bear declines. And for years, most investors saved what little capital they had because they feared that each market advance would not be sustained and they would only lose their money in the next decline (see Chart 3).

Parallels
Many investors find an eerie parallel between the Great Depression bear market and the Y2K bear market. There is an equally disturbing parallel between the behavior exhibited by today's investors and those of the Depression. During both periods, investors played the losers game by making emotional investment decisions, buying on greed when equity prices were at or near their overvalued peak, and selling at the bottom when the performance bubble burst.

As advisors, it is our job to get our clients to realize that the more than 10 percent return that investors earned in equities over the past 100 years included market declines and advances. If your clients have not yet sold their equities, encourage them to keep them so they can reap the performance burst that will likely follow the current bear market cycle. If they have sold, explain to them the opportunities they will lose by not investing for the next bull market surge.

Don't let investors tell you that the situation is different this time because of the Enrons of the world and because of the corporate malfeasance that is rife in American business today. One of the things that led to the market collapse of the Depression was the same type of corporate malfeasance. Corporate America was ruled by robber barons, and securities fraud was rampant. To restore confidence, the government passed laws: The Securities Act of 1933 to provide consumer protection against fraud, and the Securities Exchange Act of 1934 that created the Securities and Exchange Commission that still regulates the stock markets and securities industry.

Today, the government is responding to restore investor confidence with new laws to protect shareholders. Because some things never change, you can be confident that historical market performance cycles will repeat themselves. The ugly Y2K bear market will be followed by a new performance surge that will be the beginning of the next bull market. It is up to you to make sure your clients benefit.

Good news
If you have practiced a diversified approach to allocating your clients' assets, you should compare your clients' aggregate performance to the declines of the major market indexes. A portfolio diversified among stocks, bonds and cash will have performed a lot better than the indexes indicate.
Many do-it-yourself investors have made the serious mistake of concentrating their assets into stocks only. They further compounded the mistake by concentrating their stock purchases in high-flying sectors such as technology and communications. Your diversification approach should preserve your clients' capital, which better allows them to participate in the bull market performance surge that will follow today's decline. They will have a shorter distance to travel to get back to even and start making money, which of course, is the reason why people invest.

Investors and clients always try to measure the value of working with a professional advisor, and it's tough to justify your fee when your clients' accounts are down quarter after quarter. So don't be afraid to explain that your process of diversifying assets has conserved their capital, which is the name of the game in a bear market. By choosing to work with a professional advisor like you, they have conserved capital, they are still in the investment game, and they are likely to achieve their financial goals.

Don Schreiber Jr., CEO and president of Wealth Builders Inc., an asset management and planning firm in Little Silver, N.J., is the author of Building a World-Class Financial Services Business. You may contact him at (732) 842-4920.

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