You Don’t Have to Invest in the Stock Market

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The recent economic apocalypse (it’s been going on for long I’m running out of ways to say it without repeating myself!) has a lot of people re-evaluating how much they want to keep invested in the stock market. Between the dot com bubble in 2001 and the financial implosion these last few years, people just don’t trust the stock market anymore.

The reality is that you don’t need to invest in the stock market, especially if you have a short or no time horizon. There are a lot of other options outside of the equity market if you look for them. You can invest in a variety of bonds (though some say the bond market is overpriced because of a flight to safety) like Treasury and municipal tax-free bonds, hard assets like gold and silver (again, some would say they’re overpriced), real estate, and others.

I thought about this topic because a reader emailed me asking if real estate was a good idea. He’s seen his 401(k) tank the last few years while his real estate assets doing quite well (he had his own home and two condos he rents out) and was wondering if he should continue going in that direction. My “advice” (I don’t, and you shouldn’t, consider what I write as advice, think of it more like your friend telling you what he thinks) was that he should go with what he knows but be aware that he shouldn’t put too much of his wealth into one asset class.

Personally, I’m putting my savings in the bank and waiting for some good opportunities to put it to work. I still contribute to my retirement accounts whenever I can but I’m not putting any more non-retirement assets into the stock market because I’m losing faith in it. From time to time I get approached with business opportunities where I can invest directly, but I usually only consider the ones where I can leverage my expertise. It’s taking the “invest in what you know” mantra to the next level and I feel it gives me a better chance than some random stock. (this is, of course, by no means a sure thing and I don’t invest a lot, but this is where I’m going instead of the stock market now)

What do you think? Am I crazy? Do you agree with me? If you’re not investing in the stock, where are you investing now?

{ 36 comments, please add your thoughts now! }

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36 Responses to “You Don’t Have to Invest in the Stock Market”

  1. Jim,

    Passive investors are not supposed to get emotional about investing. They are supposed to stay the course, no mater what. They are not supposed to time the market.

    That’s one big reason why passive investing is far less useful than its proponents claim. You want to trust your judgment and not invest in the markets right now. Yet, the ‘passive’ crowd would tell you that this is a big no-no.

    It’s important to use your judgment. Telling that reader NOT to buy more real estate when he is already loaded with real estate is good advice. Diversification is necessary.

    I hate to see you go to banks – where the return is dismal, but it it a return and guaranteed not to lose. You are allowing your intelligence to dictate how you invest. That seems like the right approach to me.



  2. billsnider says:

    This is an individual, gut wrenching call. There is no easy answer.

    Bill Snider

  3. tbork84 says:

    The real key is making saving a priority. The vehicle or strategy is important, but the majority of people make a critical mistake by not realizing that saving is a necessity.

  4. DIY Investor says:

    Some perspective:
    In November 1972 I was 25 years old. The S&P 500 closed at 115.49 on my birthday. Today it is at 1138.69. In 1972 there were no cell phones, offices weren’t equipped with PCs, families drove station wagons. In 1972 our immediate threat was the Soviet Union. The threat of a nuclear war occupied the country. Viet Nam was raging and young people were viewed as out of control. In 1974 OPEC quadrupled the price of oil overnight and there were gas lines everywhere as gas was rationed. In 1987 the stock market crashed – the market dropped 24% in one day! I saw people quit the investment business that day. They just walked down the hall and turned in their resignations.

    Moving into 2000, pundits predicted widespread computer crashes – planes weren’t supposed to be able to fly and mass transport was expected to break down. Corporate governance was at an all time low as companies manipulated their earnings. In 2001 terrorists took down the Twin Towers. This resulted in two wars for the U.S. Some people predicted that people would never fly again.

    Today everyone has cell phones, workers have PCs on their desks, incredible breakthroughs are being made in bio tech, houses are being revamped to be environmentally friendly. The car you drive 5 years from now will be vastly different from the car you are now driving.

    Today is different. We live in an information age. Kids now have the capability to solve the energy crisis literally in their garage.

    Do you think 35 years from now people will look back and say 2010 was not a good time to invest?

    I won’t be around. so I’ll frame it in terms of 25-year-olds. You guys have no idea about what type of products are forthcoming and the companies that will be formed and the advances that will be made. This puts an investor at a disadvantage because he can always see the problems explicitly in front of him, but what can’t be seen are the industries and products that will be formed.

    One thing is for sure, though – there will always be an excuse to not invest. If I was 25 years old, I, for one, would be in the market big time.

    • JJ says:

      It’s true that the biggest mistake is timing the market. The problem is, many of the people telling you not to time the market are timing it themselves.

      Most people with 401ks put the same amount of money in at the same TIME every month. This IS TIMING the market. You need to use a basic trendline when investing. Doesn’t really matter what the trendline is, but you need to use one. If the market has been doing nothing but go up for a long period of time, you shouldn’t be putting money in, you should be pulling it out. This is especially true if you are old enough to have a sizeable amount in the market. If you are in your 20s you may be ok just investing a certain amount at the same TIME every month (since each monthly investment more dramatically affects your cost basis).

      If you are old enough to have a lot of money in (and each additional investment doesn’t change your cost basis much) then you need to think about selling as well as buying (using a trendline). If the market has been going up for years and you have a bunch in, you don’t sell it all at one TIME. You cost average out instead of cost averaging in. In this way, you are selling high and raising cash to buy low. In addition, at the highs you can still get a decent rate in fixed income.

      So many 50 year olds made a tremendous mistake continuing to dumbly invest at the same TIME every month in there 401ks in 2007. The market had a huge run from 2003 to 2007, they should have been averaging out instead of averaging in. Their mistake was TIMING the market.

      I largely agree with DIY, I just think when you get to the point where you have a sizeable nest egg, you need to think about selling as well as buying (and not just dumbly invest in your 401k at the same TIME every month all the while telling yourself that you aren’t timing the market)!

      • JJ says:

        In my opinion, Jamie is giving some REALLY bad advice here. He is not trying to, he just hasn’t learned enough about intesting in the market (and index funds in particular) to offer advice on it.

        For him, there may truly be better investment options. For those willing to adopt a clear strategy that can be defined in words, index investing works EXTREMELY well.

      • cubiclegeoff says:

        This sounds like timing the market to me. When you invest the same time every week or biweekly, the idea is there are no emotions to it and you are not thinking about when to buy or sell. I don’t consider that timing the market.

      • Vince says:

        The appropriate jargon for investing the same amount monthly is “dollar cost averaging” not timing the market. It’s a good practice since it keeps the emotional aspect out of the picture and avoids timing the market. Yes, sometimes you will be buying high but, over time it averages out without trying to outsmart the market, which “experts” fail to do over and over again. As for selling: One should balance their portfolio at least yearly with decreasing stock exposure as they approach retirement. The practices of dollar-cost-averaging and portfolio balancing are good ways to protect your investments from your unwise emotions.

    • Vince says:

      Very well stated. No one knows what the future holds. However, it seems that most people predict the future based on their current emotions. That is, the economy is in the dumps now so most feel that the ecomony will likely be the same in 10 years. I have faith (or hope) that the US and world ecomony will recover and my portfolio that is predominately invested in stocks (2/3 in US and 1/3 in foreign) will recover and my nest egg will be sufficient in 10-15 years from now.

  5. Bart says:

    There is nothing wrong with investing in the market, but many investors get into trouble when they start chasing returns or trying to time the market based on what they hear on TV or read in a monthly magazine.

    Most individuals are not disciplined enough to separate their emotions from their investing strategy and make trades at the wrong time derailing their long term plan.

    Find a local well respected Certified Financial Planner (CFP) and pay them for an hour of advice to help put a plan in place to meet your financial goals or see if they have an asset management strategy that is tailored to your risk tolerance.

  6. Jaime says:

    I don’t have confidence in the stock market. I know you’re “supposed” to invest some of your money in it, but I feel better saving it, even with inflation, I still feel better about having savings rather than money in the stock market.

    I eventually want to invest some of my money in stocks, but I still don’t have confidence in the stock market. Why should I have confidence in some system that came before my time?

    It seems all the people that got rich set up the system and its hard for anyone else that’s normal and young in their 20s to get ahead in a system that someone else previously built.

    Yeah I’m rambling and I’m sorry but I totally understand you not wanting to invest, I get it.

    • cubiclegeoff says:

      The problem is, by the time you have “confidence in the stock market” you will have missed your big return, and then you will go in and not get the same returns and still be frustrated. As others have said, the stock market is your best bet and you can’t be emotional about it. Diversify and keep it automatic. Savings will generally make your money lose value as inflation is often greater than your return in a savings account. If you’re ok with that, go with it, but don’t get emotional if the stock market has a good run and you miss it.

  7. Jaime says:

    I guess the reason I want to invest my money is because I want to see if I can benefit from it somewhat, but I don’t really expect much from it.

  8. zapeta says:

    I have a long time horizon and because of this I have a high risk tolerance. I’m going full steam in to the stock market and hopefully this will pay off. Given historical returns, the stock market is the only chance that I have to get the return on investment that I would need to retire eventually.

  9. MFJ says:

    Yep you are crazy 🙂

    >I’m not putting any more non-retirement assets into the stock market because I’m losing faith in it.

    What is causing you to lose faith in the stock market?

    >I feel it gives me a better chance than some random stock

    Well there’s your problem – don’t invest in one random stock. Pick lots of great companies if you are investing in individual stocks – otherwise buy an index fund – either way you will be hard pressed to find a better investment for the long term.

    • Jim says:

      I think that there are other opportunities out there where I can lend not only money but knowledge. The stock market is so hands off, I invest, wait, and hope my bet works out.

      I don’t invest in one random stock, that’s just a phrase, and I do buy great companies but it’s so detached. I don’t think I’m a good analyst and so I pick index funds.

      • Bart says:

        Don’t waste your time picking stocks. Pick good fund managers that share the same feelings about the market/economy and let their team pick the stocks.
        Also, find managers that can go long/short the market and are not constrained by long only investments mandates or the Morningstar style-box.

  10. Jason Ronis says:

    You’re kidding right? “This asset class is the only one that’s not overpriced because it’s under performing, so I’ll avoid it”? There’s two parts of the formula buy low and sell high. So buy low, that’s now. It’s almost always now given a long enough time horizon.

    I’m not saying keep your emergency fund in stocks, they aren’t reliable on that kind of time frame, but in terms of retirement savings… You just gotta if you want to retire. I know I have atypical returns, but it’s not that hard to do just fine in the market, you just keep buying shares of VTI, or the like.

  11. FlyFisher says:

    I share some of the same concerns. I wouldn’t put non-retirement money in the market right not with its big run, but unemployment and economic future still so unsure. Invest when others are fearful. I am not currently getting that vibe. DIY Investor has great advice though, in the long run the market is a great place to be. Currently if you have the $ I can’t imagine real estate being a bad bet. If I had the $ I would be there in a heart beat.

  12. Nick says:

    Yeah, you’re crazy, but that’s ok. You don’t “need” to invest in the stock market if you have good alternatives. It sounds like you believe you do – and you probably actually do.

    My only thoughts would be:

    Know your exit strategy (and the limitations on exiting this type of investment) before you dip in. For private companies there is no easy “sell” order you can execute, so the reduced liquidity may be an issue for you. The projected cash flow (or lack thereof) is probably the only thing you can “count on.” There is no easy “collect the dividend and then sell the stock if and when you need the principal (and it hasn’t gone down).” It’s a completely different game.


    If you’re investing all of your money in “what you know” unless you’re a jack (and master) of all trades, you’re probably not going to be very diversified. That’s dangerous too. I hope you’re not a typewriter expert…

    Good luck either way you go!

  13. Debra says:

    Hi Jim and all. Jim, in response to your current practice of putting your savings in the bank and waiting for opportunities to invest it, I would be interested in your take on the predictions, seen more and more frequently in the last few days,

    (1) that 90% of the banks will ultimately fail with the FDIC unable to cover all the deposits; and

    (2) that we’re heading for hyperinflation in the NEAR future, which will entail the complete devaluation of Treasuries and the US$ and eventual replacement by some new form of currency, with a system of barter in between (perhaps for years).

    It’s seeming more and more like every conceivable investment plan has some serious risk or drawback associated with it. I currently have my money in a couple of money funds restricted to short-term treasuries, a local credit union, and some metals. I don’t feel good about any of it, but I really don’t know where to turn.

    With the above specific worries in mind, do you have any suggestions for me?

    • cubiclegeoff says:

      March of 2009, people were predicting the Dow to 1,000. Predictions are everywhere, but it doesn’t mean they are correct. This sounds more like fear mongering than anything else.

  14. I have the same level of faith and confidence in stocks that I did when I started investing. Nothing has changed. While the market and the economy continue to founder, the reality is that this is nothing new. There have been and always will be extended periods of high volatility that result in very small gains or even losses over 10 years or more.

    While alternatives abound, not one can hold a candle to the long-term returns of equities. Sure, you can invest outside of the stock market (and should with a portion of your portfolio), but you’ll have to save significantly more to reach your goals because of the relatively low real returns over the long haul.

    The cruel fact remains that the overwhelming majority of us don’t save enough even if we use a 10% nominal rate of return or 6% or 6.5% real rate of return. Do a retirement calculation on what it would take with a 1% or 2% real return and the numbers are staggering.

    This leads to my main point which is that all assets depend on equities moving higher over time as it is part of the virtuous circle of economic growth. If businesses aren’t doing well, they make less money. This means that their cost of financing becomes more expensive as their bonds become riskier. As business income falls, so too do tax collections for the government. As tax collections fall, government deficits and debt grow. At some point, this can reach a breaking point when currency is devalued. During this vicious cycle of economic stagnation or even decline, unemployment persists and perhaps continues to grow. If you believe that this is a permanent cycle – a complete reversal of what capitalism has delivered over the last few centuries, and something that is fundamentally counter to humanity – then exit the market for good.

    Of course, these things have happened before and we eventually get back to growth. If you believe that the economy will again grow and that businesses will position themselves to take advantage of it, there is no better place to be than in equities.

    BTW, those opportunities that you speak of where you can use your expertise, those are equities too, and this is precisely the time that grand slam investments can be made in startups. You can buy more equity for less money right now than you could even dream of in the late 1990s or even 2005-7. Of course, there’s also a great deal of risk, right?!

  15. Mark says:

    What is a good resource for learning how to invest? The different types, trends, definitions, the ins and outs, everything else I don’t know? Starting from the basics. Preferably something that goes into great detail and is unbiased. I’m 22 and I have around 10g to “play” with. Thanks.

    • Bart says:

      Find a local well respected Certified Financial Planner (CFP) and pay them for an hour of advice to help put a plan in place to meet your financial goals or see if they have an asset management strategy that is tailored to your risk tolerance.

      Before that I would do the following:
      –Make sure all your debt is paid off
      –Save 3-6 months of expenses in a liquid “emergency” fund that is not easily accessible (so you won’t spend it)
      –Start funding an IRA/401k (up to the match)
      –Max out Roth IRA
      –Max out 401(k)
      –Start funding a personal brokerage account.

  16. Joe says:

    I’m with you. The stock markets have been too crazy in the last few years and they always seem to have a way of biting the hands that feed them. Even real estate is clearly up and down and largely dependent on where your holdings are.

  17. The Baglady says:

    I’m investing in some established websites now. I have enough money in the stock market, and a good chunk of equity in my home, so I consider it a way to diversify.

  18. Mike says:

    I think you are right about not putting all eggs in one basket.

    However, not investing in stocks/mutual funds now is a mistake. I doubled my 401k contributions in 2009 and was rewarded handsomely in the short run.

    I think any balance portfolio has some stocks in it. Moderation and balance are key.

    Additionally, don’t invest with your gut or heart or head. Invest then make a plan for how much you want to sell for as your min gain and max loss.

  19. Shirley says:

    “Moderation and balance are key.” At 68 and retired, I have very little invested in stocks and more in Mutual Funds that have shown a good return. We have recouped most of what we lost in the market downturn.

  20. Fontaine says:

    Jim et al,
    Allow me to be the contrarian.
    Real income is the same as it was in 1980 (adjusted for inflation). Yet, our personal debt as quadrupled.
    Many people in the market experienced a lost decade with their retirements accounts for years 2000-2009.
    Just because staying long in the market has always been the rule of thumb or the “right thing to do” for investors, that does not mean it is the way to go in the future. You see, past performance is absolutely no indication of future performance. Our country is in more debt than we have been since the end of WWII. In 1945 we brought millions of young men and women home (there was even a housing shortage) and they quickly got to work making money and babies. They created a boom. We do not have that now. There is no boom right around the corner. We are in a terribly high amount of debt and there is no relief in sight. Our gov’t keeps spending. And it is stressing our country, our people, and our markets. So, I say, this time it’s different. We will not rev up to become the powerhouse we were in the 50’s and 60’s that helped sustain us through the turbulent 70’s and early 80’s.
    Just because you have always learned one thing (stay long in the market) does not mean it will always be true. Look at Japan. How many retirement accounts made money in the past two decades? They STILL haven’t recovered from their market peak twenty years ago.

  21. Gates VP says:

    Hey @Jim;

    I’m late to this game, but I’m going to go way out here.

    #1 investing opportunity: education.

    This is ridiculously important for those living in the US. If you’re under 30 you should have a college degree. If you’re over 30 and plan to stay in your career course, it’s time to start doing continuing education. (blanket statement please apply to spirit)

    I highlight the US, b/c it’s currently in a crisis. Everyone here wants to live a “middle-class” life, but half of the “second world” (Brazil, China, India) also want to live that life. The US middle class is slowly evaporating and it’s not really coming back, b/c the country can’t really afford it.

    So my advice to the “average” American (in Kansas City that’s 33k / year!) is to invest in education of some form.

    Not only is there no guarantee that the markets are “coming back”, the markets are a very low control medium for building wealth. And they don’t really scale.

    Here’s my simple take on it.

    Each person can work to improve their individual value. They can do this without “taking away” from others, they can produce more, or better, or for less and this benefits everyone. This is why education is important, humans are capable of producing more.

    However, “the markets” and “bonds” are relatively inefficient methods of producing. In theory, you’re lending money to big companies in an attempt to help general production. And for a time (a long time ago), this worked and made sense.

    But the stock markets are no longer really about dividends and interest. They’re mostly just a game. So if you figure you’ve got the education thing down then:

    #2 investing opportunity: something you know
    – a home you live in
    – a creative side project
    – your kids
    – VC-style funding of products you know or ideas that you’re familiar with
    – then maybe some market investing if you don’t mind irrationality

    Personally I’d also like to see peer-to-peer lending open up in a big way to really provide more concrete options in more reasonable amounts for the average person.

  22. Doug says:

    We liquidated our stock assets just in time before the last “correction.” The previous year we were in “managed accounts” and lost $33K with 5 year losses of $164K. We do not trust the greed behind the market. Everyone pays themselves first and if I make money – doesn’t matter to them.
    I am sleeping again after 25 years in the market – all cash deposited in 4 banks.

  23. Brian Stemmerman says:

    My wife told me to check out your site Jim. Found this to be an interesting topic. Had to reply. I have been trading UVXY and SVXY ETF’s. They move up and down due to the fear index “VIX” of the S&P. The market goes up when the news is bad and down when the fundamentals are good. It is not a real market and would not advise anyone to invest like me. We just came out with a whopping 1.8 GDP and the market went up 160 points on the DOW. Very sad for almost five years of QE. That 1.8 GDP tells investors that the Fed will continue to prop up the market with digital money. It has become a drug. When the printing comes to an end the market will drop 50% or more. The country is in big trouble, yet he media tells you that everything is great. To understand what I am saying you have to look at the three peaks of he DOW. Pull he DJI chart up and look at the last ten years. This chart tells me that we have to create bubbles to substan a dieing economy. The Fed is telling the market that they are ending the 85 billion per month QE in 2014. They might reduce in Sept. Do a search on US DEBT CLOCK. It can not be paid back. Interest rates are going up. My point is: Stay out and invest in yourself and family. When the mess works it self out and losses are taken and they can no longer kick the can down the road. It is time to get back in.

  24. Debbie says:

    I am put off by the fed’s help. Even a year after taking my money out of stocks, I am sure it’s going to tank on all those smart and lucky people who keep their money in the market.

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