Investors should not panic in downturn, study says

There have been 12 bear market cycles in the last 60 years, and investors who held on to investments during each of those instances made gains in the long run, according to the new report based on quantitative data issued by Boston-based Putnam Investments.

Since 1948, there have been 12 bear markets that lasted an average of 14 months and saw an average decline of 22.4% in the Standard & Poor's 500 stock index. After each of those, economic conditions improved, with 12 bull market occurrences lasting an average of 45 months and seeing an average 123.9% gain in the S&P 500.

If someone had made a $10,000 investment in that index in 1988, it would have grown to $72,932 by June 30 despite the market falling 43% from 2000 to 2002, according to the study.

"It is really striking how much [longer] these bull markets have lasted," said Elaine Sullivan, managing director of retail marketing at Putnam. "It really helps put things in perspective."

In advising investors who are contemplating selling shares in a down market, Putnam urges them to consult with a financial adviser to determine whether other factors may be adding drag to their portfolios, such as a lack of diversification. Putnam is hoping its study can be used as a reference point for advisers when talking to frustrated clients thinking about selling in a bear market.

"One of the key roles for an adviser is to take the emotion out of investing," said Ms. Sullivan. "Anytime you're living in a turbulent time, you always question when the end will come and when better days will be here."

Many advisers agree with the Putnam study's findings and are urging clients to avoid the knee-jerk reaction to sell in the current bear market as long as their portfolios are well-diversified. However, the long-term strategy can be a tough sell when clients are incurring severe losses, said Jennifer Hartman, principal at Greenleaf Financial Group.

"Instant gratification is not usually a smart long-term move for any decision," said Ms. Hartman, whose Los Angeles-based firm manages around $14 million in assets. "If you do sell your assets for no other reason than the market is down, then the fact of the matter is that you are trying to time the market."

"We're not recommending that our clients sell at this point," said Mike Gorman, co-owner of Peta-luma, Calif.-based Wiiken & Gorman LLC, which has around $250 million in assets under management. "Most of our clients are well-diversified."

In addition to calming their panic, Scott Toms, chief investment officer at Hagerstown, Md.-based Cornerstone Wealth Management Group, urges clients to diversify and to be prudent when investing in large cap offerings, because losses may be greater.

"You can really miss big moves in the market if you get out," said Mr. Toms, whose firm manages around $150 million in assets and is licensed through Boston-based LPL Financial. "We try to stay invested in various asset classes."

Keith Newcomb, a wealth manager at hourly fee-based firm Full Life Financial LLC of Nashville, Tenn., is skeptical about the Putnam study's findings because, he argues, investment strategies need to be geared toward a client's individual lifestyle and not based on 60-year data.

"The sequence of returns is so much more important than the conclusion drawn from a 60-year period," said Mr. Newcomb. "Advisers and clients should have a strategy in place to prevent runaway losses in some sectors, [which happened to some] during the last bear market."

E-mail Andrew Coen at acoen@investmentnews.com.