Today’s Devil’s Advocate post is going to hit at the very heart of the financial sector. The stock market is one of the cornerstones of the American economy and one that has brought riches, big and small, to many an investors. However, many fail to realize that it’s a zero sum game. For every one of those rags to riches stories about a kid who took $1,000 and turned it into a million, there are many many more stories about a single mother of four losing it all (yes, I’ve chosen extreme examples for both). So all those awesome stories you hear, that’s only half of the equation!
Now that you’re aware of the stock market sob stories (no one really likes to talk about those), there are plenty of other reasons why the stock market is probably not the place for you to seek your riches. The dot com boom gave birth to many a day trader and the dot com bust ended the lives of many a day trader. So, here’s why you shouldn’t invest in the stock market.
Historical Returns are Meaningless
The Roman Empire had hundreds of years of prosperity prior to it’s decline and eventual fall in 476 AD, you think shareholders knew? (excuse the surprise mixed up metaphor) While diversification often helps prevent this sort of calamity, there’s is never any way for someone to guarantee events into the future. Stock market pundits can claim that the S&P 500 has historically return low double digits and that your money is well placed in those areas, they never seem to be able to predict when the stock market will take a bloodbath on a Black [insert weekday here]. If they could, they’d be in the basement of Lehman or Goldman Sachs (Goldman may actually have psychics working for them, they did make a fortune by betting against subprime).
All the models n the world also couldn’t have predicted external forces acting on the stock market. Could you have predicted 9/11? (though if you were to look at the futures trading leading up to 9/11, you would’ve felt as though someone knew what was coming)
You’re Investing Emotion, Not Fundamentals
Let’s depart from the scare tactics and talk about more grounded reasons you should avoid the market. Check out Under Armour’s stock (UA ), it’s fallen nearly 18% in three months. See that massive chasm in mid-January? At that time, half the value of the stock had evaporated over the course of the trailing 90 days and the only attributable “news” was that the founder was selling a lot of shares back in November. Corporate insider selling can be a telling sign but fifty percent over three months? That’s emotion. (Subsequent downgrades didn’t help the matter) Oh, and since that chasm, 36% increase (a Q4 income report that beat estimates did help). That’s emotion.
Focus On Something Else
Let’s be honest, you can’t pore over financial statements and do any true due diligence. In fact, you probably don’t have the time or the inclination to even read the analyst reports and the charts they produce. You might flip through them to get a feel, you might try to force yourself to read them to assure yourself you’re making the right decision, and you might even get streaming real time stock quotes to get a sense of the action and feel the “pulse” of the market. Ultimately, given a choice, 99% of people would rather be doing something else. Would you rather play golf or read a balance sheet? Would you rather go to the Bahamas or listen to a shareholder’s conference call? How about going to a spa and getting massage… or listening to a CEO blow smoke? Unless you’re being paid a salary, commission, or the promise of a fat bonus, you don’t really want to be doing that. Since you don’t want to be doing that, it also means you are ill equipped to invest in stocks because without that information you’re basically gambling. At least casinos comp you when you lose big. 🙂
Retirement Funds Make Retirement Managers Rich
So you contribute to your 401(k), that’s wonderful. Your employer gives you a contribution match, that’s also wonderful. The bloody retirement fund manager takes out 1.5% in fees each year just to manage your funds. If you had your way you probably would put it in an index fund at Vanguard or Fidelity (fees are in the point-teens, that is they are all less than 0.2%) but you don’t get that option in your retirement fund. The reason you don’t is because 401(k)’s and your mutual fund options are a racket. That’s right! Why don’t 401(k) plans offer one of the best ways to invest? Because there’s no money in it for them. When you contribute $10,000, they get to take out $100 each year. Think of when you’re balances are in the hundreds of thousands? That’s a couple thousand in fees each year just to “manage” it. This is made even more ludicrous when you realize most mutual funds don’t beat their benchmarks. (If your company’s 401(k) lets you contribute to an index fund, that’s incredible and you are lucky – take advantage of it.)
There are plenty of reasons why the stock market is a Bad Idea, I’ve only shared a handful with you. This concludes this edition of the Devil’s Advocate.