Devil's Advocate 

Don’t Invest In The Stock Market

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This is a Devil's Advocate post.

We are led to believe that the best place to invest our money is in the stock market. Low barriers to entry, low barriers to exist, plenty of information, high probability of success in the long run and a lot of success stories. We also hear some of the horror stories of people who day traded tech stocks in the early 2000s, gamblers who lost it all on penny stocks, and all the chop shop, pump and dumpers like in the movie Boiler Room. However, through it all, we’ve been taught, over and over again, that if you buy for the long term, you will always win.

For today’s Devil’s Advocate post, we’re going to break down the stock market and show why we really are just little guppies hoping not to get eaten by the sharks.

You Have No Advantage

In the stock market, the average investor has absolutely no competitive advantage over other investors. I’ve always said that you need an advantage to succeed and most of us don’t have one in the stock market. The traders on the floor have the advantage of seeing up to the second activity. The traders on Wall Street, even if they aren’t on the floor, may have a network of contacts in the media, may know other analysts in other brokers (or their own), or have good relationships with company employees so they can get a slight edge in information. Whatever the case, they have an edge you and I don’t.

Is it a make or break edge? Sometimes, yes. Most of the time, no. I liken it to playing a sport without knowing how much time is left on the clock. It won’t make or break you but in the long run, but occasionally the clock will run out on you or you’ll shoot too early. Either way, it’ll hurt and the stock market is a long run type of game.

Buy & Hold is not a Complete Strategy

If you’ve done any reading of stock market investing, you’ll know that all the introductory texts talk about the idea of buy and hold. They warn against trading and they suggest that you diversify. The basic stuff is pretty straightforward and it’s appealing to follow and write because it’s simple. However, buy and hold only gives you one direction to win and stocks move in two directions.

The point of this reason isn’t to slam the buy and hold idea, I think it’s valid as long as you have a long time to hold. The reason I bring it up is because all too often we stop here and thing we’ve accomplished the mission. Stock market investing is very involved and if you stop at buy and hold, you leave yourself open to a lot of risks.

If in the last two years you had a trailing stop loss and you were nearing retirement (or whenever you’d need the money), you could’ve saved yourself some money by selling. Buy and hold until the bitter end may seem honorable but the only person benefiting is the guy shorting your shares. 🙂

Actively Managed Funds Suck

It’s a well known fact that the majority of actively managed funds don’t beat their benchmarks but many of us are forced into actively managed funds in our retirement accounts. Why? Brokers don’t make much off index funds! Both of my former 401(k)s offered a mix of actively managed mutual funds with fairly reasonable expense ratios (they were all under the industry average). Neither, to my knowledge, offered index funds, the cheapest mutual fund options available.

Saving for your retirement is important and it’s great that vehicles such as 401(k)s and IRAs exist, but ever wonder why, in most cases, you can only invest in the stock market?

Insufficient Analysis

Finally, most of us don’t do nearly enough analysis of a stock or a mutual fund before we buy it. It’s because it’s not our passion. Do you really want to pore through income statements and discounting cash flows based on your expected return? What about calculating the return on equity for the last five years and using that to project a price target in X years given the current P/E ratio? While those were mouthfuls of sentences, they are actually quite basic calculations to do. Now imagine doing that for all the stocks you were considering investing in (after whatever filters you applied using stock screeners) as just a starting point to know how much to pay for a share.

Asleep yet? That’s because most people don’t care enough and if you don’t care, you can’t succeed. Most of us would rather pursue our hobbies or spend time with loved ones, so we put it into actively managed mutual funds that suck. Or we go into index funds (my choice) because then we get the benchmark. Either way, we don’t do even the most rudimentary analysis required so we shouldn’t be in the game at all.

I’d love to hear your thoughts on this as the stock market is one of those very polarizing topics. Many fortunes have been made and many retirements have been secured through the stock market, but I think people are thinking differently after the economy punched the market in the gut (or lower!) last year.

Please let me know what you think!

{ 49 comments, please add your thoughts now! }

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49 Responses to “Don’t Invest In The Stock Market”

  1. Steven says:

    Well, like all investments, there are risks.

    And no one ever talks about the real possibility of losing money.

    When someone gains money from the stock market, there’s a good chance it’s at someone’s loss, whether it already happened or will happen in the future.

    • Sometimes a company simply becomes more valuable. If you buy Acme drug at $50/share and then Acme develops a drug that cures cancer and the price shoots up to $500/share, your gain is not at anyone else’s loss, but simply a prediction of mountains of profits in the future.

      But, yes, clearly you should take into account the possibility of losing money.

      • Vasanth says:

        Defintly that gain is some one losses. The price should have some point goes down or up . going down , the guy who bought it for 500 will take the loss.

  2. My employer, by nature of the industry it is in, actively manages billions of dollars in investments and historically does a very good job.

    So I can let them manage my 401(k) (based on input from me) for free or I can be hands-on. I prefer to give broad guidance and let the experts do their work. I figure that I have just enough knowledge to be really dangerous 🙂

  3. zapeta says:

    Sure, the stock market has risks but you must take on the risk if you’re looking for a good return. My time horizon is long, so buy and hold is a perfect strategy for me. I know I’m not going to beat the market so I buy index funds and hope to match the overall market. For me, the potential reward far outweighs the risk. If I were a few years from retirement it would be a different story.

  4. One of the things I hate the most is actively managed funds that have high fees. I would much rather use an index fund like the ones at Vanguard.

  5. Marx_ says:

    The buy and hold strategy only works if you buy one day and hold forever. Hold forever doesn’t mean for a couple of years or decades, it means forever. Having that kind of investment mentality will reduce the amount of stress you carry with you every day. There are enough things in life that stress us out, why add one more unnecessarily.

  6. Santos says:

    1) You have no advantage – True but niether do the pros. No one can predict the future. Not even by devoting every minute studying the market (this would be like claiming that water boils faster by observing it intently).

    2) Buy & hold is not a complete strategy – It is if you hold the entire market. Of course you need to have the appropriate time frame to execute it but that that is true for all strategies and it does not argue against the B&H strategy.

    3) Actively managed funds suck – absolutey true!

    4) Insuficient analysis – If you are buying the entire market through index funds there is only one data point you need: Expenses. Keep that down and you will do as well as can be expected and better than most.

  7. Clayton says:

    Playing the stock market means you have to pay attention to things you can’t control. I disagree with a complete long term buy and hold because I don’t feel like losing 20-30% value each time there is a big bust because how long it takes just to come back to prior levels.

    I buy and hold during good times and switch to bonds (normally) during bad times. So I’m really just following the business cycle and not really timing the market.

    Investing in real estate and land where i live is another great place to put your money when you have enough. For example if you have a storage building and rent it out on a 5 year contract, you have a solid income stream for the next 5 years and can get a better return on your investment by doing it yourself. Heads up, things like this can take up more of your time though.

    • “I buy and hold during good times and switch to bonds (normally) during bad times. So I’m really just following the business cycle and not really timing the market.”

      Can you please let me know when the good times and bad times are before they happen?

      Every time I try this I end up acting AFTER the market moves, and by doing so I make things WORSE for myself…


    • cubiclegeoff says:

      “I buy and hold during good times and switch to bonds (normally) during bad times. So I’m really just following the business cycle and not really timing the market.”

      That seems like timing the market to me.

  8. Santos says:

    Marx says B&H works only if you hold forever. How you figure?

    If by “works” you mean that the amount of money you end up when you decide to “cash your chips” is higher, I submit to you that more people do far better with a steady B&H strategy (asuming they hold the entire market) that those trying to “manage” their holdings.

  9. TJ says:

    Clayton, buy-and-hold during good times, then switching to bonds in bad times IS, by definition, market timing.

    I recommend doing a web search for stock market timing and seeing some great sites that do all the difficult analysis for you, so you can identify times of strength and weakness:

  10. “In the stock market, the average investor has absolutely no competitive advantage over other investors”

    I don’t believe that’s the point. Why should you need an advantage? Let’s say you begin with a 0.5% disadvantage (fees to an index fund).

    If (and it’s a big if) owning stocks is the best path to financial independence, it doesn’t matter whether you beat everyone else – due to an advantage. All that matters is whether you do better than placing money elsewhere. In other words, do YOU benefit from investing.

    I cannot supply the answer, but being at a small disadvantage does not count. Making money, planning for retirement, is not a competitive sport. You either win or lose.

    Our task is to find the best method for winning – having enough to meet our needs.

    Of course – my constant mantra – is that hedging provides the safest path towards winning.


  11. tbork84 says:

    Buy and hold is a worthwhile strategy for most investors. The problem is people forget to re-balance their exposure to stocks and bonds or adjust it as they to a certain age. By adjusting the amount of your portfolio that is in stocks and bonds once a year to keep it constant you are actually decreasing your exposure to a possible bubble and increasing your presence in a market that may be due for an uptick.

  12. Stephen Popick says:

    Oh Jim, Why?

    Historically the market index has returned what, 6-7 percent, right? And if we look at a very long time horizon, the market has never lost your money, adjusting even for inflation. So what on earth out there beats 6-7 percent return? CDs? Your mattress? If you are going to suggest this route, offering an alternative is necessary!

    We need, an advantage? Here’s the advantage. We use an index fund and we don’t lose money to constant trading like the traders. Advantage us!

    Further, you downgrade actively managed funds correctly, but not everyone has that problem! The government, for instance, offers a TSP that is just an index fund! In fact, that is standard! And if not, just go with a ROTH 401K offered at Vanguard. The options are out there.

    I honestly believe that this kind of short post only serves those who want to mislead investors rather than getting us to ask the important questions. It’s not a knock on Jim, but a knock on how this was delivered.

    To Steven, the stock market is not a zero-sum game over the long haul, that should be obvious, so one person’s gain isn’t another’s loss.

    And Clayton, you’re timing the market. And if you know when the good times end and bad time start always, you’re a savvier investor than Buffett.

    • Jim says:

      Why, oh why… 🙂 It’s a Devil’s Advocate post, which is designed to open our eyes on the other side of personal finance advice… which I believe to be a valuable exercise.

  13. HT says:

    Trading is great. Buy and hold doesnt’ work at all. I mean the point of buying is to eventually sell for a profit, right?

    Or do you only mean for some designated period of time, like twenty years… If I buy a penny stock, and then sell it two days later did I buy and hold? I mean I bought it and held it (before selling it). What’s the rule here?

  14. Thank you for presenting the other side of the buy and hold argument Jim. Historical stock market returns of 6%-7% do not mean that we can expect that type of return forever. And forever isn’t forever. Forever is the number of years left in your life.

    CDs are a viable and safer alternative for those who don’t care to (or aren’t knowledgeable enough) to ride the stock market roller coaster. Yes, I know rates are low right now, but they won’t be forever. It’s important to know your risk tolerance and adjust your market weighting accordingly. If that’s 100% in stocks for you, that’s fine. But 0% or any other number is OK too, if that’s where you’re at.

  15. What about all the delusional people who attribute their gains to their own acumen? Love that! You will dash their dreams, b/c in life, nobody loses money on the markets. We only WIN!

  16. Clayton says:

    You could call it timing the market if you want, but I like averages. like the average length of the business cycle, average length of the contraction phase and such.

    Go to This is the list of cycles from the national bureau of economic research. You can see that the average length of the entire cycle is about 4-5 years. one of those years is going to be the contraction phase. i have risky, average, and low risk savings areas. i take my risky funds into something safe after about 2-3 years and put them into something safe for about a year.

    yes I could be missing lots of profits and no i’m not saying when the market will go down I might just have missed on plenty of profit, but if it does what it has on average then I can be sure that at least I am protecting myself for what one can reasonably expect based on this model. sometimes it protects my assets and sometimes I miss out on more profit.

    So not I’m not saying I can see the future or have some 6th sense. I am just taking a look at the general business cycle and trying to use that to my advantage.

  17. eric says:

    I’m not necessarily shunning the stock market now (I’m still young and need the growth) but I do think I’ve grown more alert to the risks involved. I’m not jumping on 100% TIPS but this Great Recession has taught me really what my risk tolerance is and that in itself is a valuable lesson.

  18. Shahid says:

    To be honest, I lost $82K since 2005 (when I opened my first brokerage account). Much of that was due to inexperience in the market and not knowing how to trade. My wife hated me for it and told to me to never trade again.

    However, it wasn’t until the Spring of 2009, I realized how to effectively trade and bank profit. I have made back all the money I initially lost and am finally on the positive “GREEN” side.

    Now, before I trade a stock, a lot of work goes into research & DD. I cannot completely stop trading…..its almost like an addiction.

    It’s your money…..make it work for you!

    • govenar says:

      Can you tell us what you “realized … to effectively trade and bank profit”?

      • Shahid says:

        I started studying technical analysis of charts. By looking at trends and other various indicators….it helped me from trading blindly (like I had done before).

  19. I think the landscape of stock market investing has really changed in the last 15 years with the internet. Your average person was not a trader then, simply because it was not that accessible. There was no ETRADE to go log onto and day trade.

    I think the fundamentals do not hold the weight they did. Really, if a company that has over 1 billion in market cap misses earning by a penny, their stock price can drop by 10% in a day – wiping out 100 million of their capital value.

    What is fundamental in that?

    • Great point. Although I’m not personally a fan of investing in individual stocks for myself, on occassion it’s pretty apparent that investors are reacting emotionally rather than reationally and unfairly killing a stock (or, on the flip side, over-reacting to good news. A case in point was during the recent crash, where entire industries were kicked to the curb – including the companies that were performing well.

  20. jsbrendog says:

    i will more than likely never get involved in individual stocks but am more than confident in index funds to return a profit, whatever that may be, over a long period of time. buy and hold is my strategy and im sticking to it…yeah…that’s the ticket

  21. Bonnie says:

    I’m not sure that this was the most well-thought-out Devil’s Advocate post. The first two points are not points against the stock market, but rather, points against investing in individual stocks and reasons to invest in mutual funds. The 3rd point has nothing to do w/ investing in the stock market vs bonds or MMFs, but a case of actively managed vs passively managed mutual funds. The 4th point could be said for any financial instrument, whether it be stocks, bonds, mutual funds, credit cards, CDs or any other financial instrument where the consumer doesn’t bother to do research, learn how the product works, and read the fine print.

    Regarding the 4th point, I often see posts & comments on PF blogs that tout the wonders of index funds, as though all index funds are wonderful and all actively managed funds are horrible. However, an index fund is only as good as the index it tracks (or attempts to mimick) and the fund’s ability to accurately track the index. For example, the widely used S&P500 index is built by weighting member stocks by their market capitalization. So, if a stock is highly overpriced, it’ll have a high market cap and be over-represented in the index. Whereas, if a stock is trading at a discount to its intrinsic value, it’ll be underweighted in the S&P500. So, by investing in an index fund that tracks the S&P500, you’re buying more into overpriced stocks and less into underpriced stocks, or exactly the opposite of what you would generally want to do. So, on Jim’s 4th point, I really don’t think that most people fully understand index funds, either.

    Regarding actively managed funds, while I would agree that if you’re not going to bother to do your research, you shouldn’t be investing in them, they can be very useful in a down market. If you can find a stellar fund manager (names like Lynch, Danoff, Gross, Yacktman), they can severely reduce your losses in a down market (unless we have a year like 2008 when over 80% of all asset classes had losses, many severe). And when you’re trying to dig out of that hole, it’s much easier to dig out of a 20% loss than a 35% loss (the former would require a 25% gain to break even, while the latter would require a 54% gain to break even).

  22. Anonymous says:

    1 – “you have no advantage” mmmmm, really? Instituational market participants are graded on a daily basis, subject to daily questioning by their superiors and the requirements of their financial backers. Now I’m not saying individual investors have a natural edge in trading (by all accounts they don’t, absent inside information), but long term investing is a different story.

    2 – “buy and hold isn’t complete”, well no it’s not complete in the absolute sense, and I don’t think it was ever really proffered as being so. It’s basically a euphemism for long term investing (i.e. not trading). Maybe something like buy, hold and rebalance would be closer to complete, but since everyone has a different objectives, a one sentence perscriptive is impossible.

    3 – “actively managed funds” suck – yep, so what is your point.

    4 – pooring through the financial statements of individual companies isn’t going to give the individual investor an edge (didn’t we cover this in No. 1). 40 hours a year would be sufficient for a person of average intelligence to construct and manage a broadly diversified portfolio this includes time spent on general education of investment matters (also this is an extremely conservative number, the real amount of time is probably much less).

    The equity premium exists, get yours while you can.

    If you don’t have the time, aptitude, diligence and emotional fortitude to do it by yourself, hire a fee based (not commission based) financial advisor (don’t pay more than 50 basis points in annual fees).

  23. Holding stocks until the bitter end seems to be a horrible strategy since there’s so much risk without the potential for as great of rewards nearing retirement. The overall buy and hold coupled with low cost index funds has proved itself in the past and is recommended by Buffet for any non active investor so I agree that actively managed funds are something to avoid.

    I think starting out people often forget that their best investment could be themselves or the businesses they start.

  24. Dave says:

    Count me in as another vote for using a cheap index fund. Trying to time the market is like going to the casino…you might win or lose, but the odds are stacked against you with various fees.
    The only reason I can think of for a long term investor not to invest in the market is if you think USA is going to lose its elite status and our market will tank forever. Even if that’s what you believe, I still think you should go stocks and diversify by investing more heavily internationally.
    Ironically, seniors investing wisely should have done very well with the market drop. They should have gotten an artificially better return when the market went up so high previously, and switched to a more conservative mixture the last several years and not gotten hit so hard.

  25. Anoop says:

    Here is the investment code I live by
    1) Invest in index funds, bonds and gold ETFs. Real Estate Investment Trust funds if they exist in your country.
    2) Decided your asset allocation between index funds, bonds and gold depending on your risk appetite. Your percentage in age in bonds, 10% in gold and the rest in Equity is a fairly decent starting point
    3) Invest every month as per your asset allocation
    4) Every 6 months, check that your allocation is on track.
    5) Every 3 years adjust your asset allocation based on your current risk appetite, or the time remaining to retirement or to when you need your funds
    6) Have all this investing automated
    7) The above assumes you have access to 6-12 months of funds in a highly liquid asset (high interest savings account, CD ladder).
    8) The above tends to get boring as everything is automatic once it is set up. If you want the thrill of the stockmarket, you could do as I do. If the asset price drops below the 1 month and 6 month moving average, buy more of the asset (again keeping your risk appetite in mind. You shouldn’t mind losing 50% of what you are investing in the short term). Keep buying, even when it keeps falling, at 5% intervals. Stop buying extra (above your regular monthly investment) when the asset price rises above either the 1 month or 6 month moving average.
    9) If you do step 8, and you want to book profits, do it only when the stock price rises above both the 1 month and 6 month moving average. Do it in the same amounts that you invest monthly. Also do it after keeping in mind your tax liability from the gains

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