June 14, 1997

Investing Risk Not Realized

Chet Currier Associated Press

While they bask in the confidence of a huge, mostly happy clientele, the people who run the nation’s mutual funds still have some important credibility problems to worry about.

At industry forums, they remind themselves repeatedly that the trust they now enjoy owes a lot to an extraordinary 15-year bull market for stocks - and favorable conditions in the bond and short-term money markets as well.

The true test of the industry’s love affair with investors, everybody agrees, won’t come until the financial climate turns less friendly for an extended period.

To try to prepare for that eventuality, many fund organizations have sought to keep things cool by talking down investors’ expectations.

“We are not trying to predict the advent of the next bear market,” said John Brennan, president of the Vanguard Group, the nation’s second largest fund manager, which recently published a 24-page booklet titled “Bear Markets: A Historical Perspective on Market Downturns.”

But he added, “many investors may not fully realize the risks of stock investing, especially the risk of a prolonged period of declining prices.”

That’s commendable candor. And it’s just one instance of the many voluntary warnings the fund industry has been issuing for years now.

The only trouble is, the stock market keeps climbing to new highs, making prudence look foolish over and over again. Since the Dow Jones industrial average surpassed the lofty level of 5,000 a year and a half ago, it has soared 50 percent more.

As Arthur Zeikel, president of Merrill Lynch Asset Management, observed recently, “All of us that have been trying to teach the lessons of history have been dead wrong. The listener has to some extent been turned off.”

Zeikel added, perhaps only half-jokingly, “A wise old man once said that being too early is indistinguishable from being wrong.”

The danger is that by the time all the cautionary comments come true to any extent, their audience will have long since stopped paying any attention. The ensuing letdown might prove as unhappy as if no warnings had ever been issued in the first place.

As Wall Street economist Henry Kaufman noted recently, “These are prosperous times. To assume, however, that a new era of permanently improved economic and financial performance has been attained is rather simplistic.”

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