Much the same way that living organisms have distinct lifespans, companies, too, come and go; and, like people, some companies live to be a ripe old age, while others die much too young.
For investors, it can be a difficult choice whether or not to invest in our Blue Chip grandparent-like companies, ones that can be very slow to move (in price) and rather stingy (Uhh, Hmm — I mean frugal) with their money (i.e. a low dividend yield), or to invest with the young, up-and-coming yuppies who have great ideas but no clue how to run a company or how to invest for the future. Fortunately, however, for us lowly, individual investors, there are indices, index funds and index ETFs.
Indices are like societies; though individuals eventually pass away, societies continue on. Said another way: Indices, like societies, never cease to exist. The point I’m really trying to make here is that investing (especially in equities) carries risks, and some of those risks can be minimized through diversification — diversification through the indices themselves and though the investment vehicles designed around the indices.
I know people who have limited their investments to one single asset or asset class and lived to regret it when the housing market collapsed in late 2007. In my earlier years as an investor I , too, made the mistake of believing that I could maximize my gains by placing big bets on single stocks; stocks I believed would be “winners;” only to later discover that some of those winners turned-out to be really BIG losers.
Luckily, however, I learned my lessons well; a fortunate result brought about by a very unfortunate consequence. Now, instead of investing in individual companies, I have investments in a municipal bond mutual fund, in a corporate bond ETF and in a “total” stock market ETF (an index-like investment that covers small, midcap and large companies). I also hold several high quality corporate bonds and some precious metals.
It is sad to me that the worst performing assets I have ever owned have been my equity holdings. I find that to be a sad because the stock market is precisely the place where most individual investors look to park their money (and the place where many of them lose their money). It is also sad because it was once the place where companies could turn to raise capital to help them grow their businesses, without having to worry too much about Wall Street eventually seeking to destroy their enterprises. Think about this for a moment: How many new businesses have come to market over the past couple of decades and truly flourished? A very small handful — maybe. Many of those new issues are already going the way of the Dodo bird. Can you name any of them? Here, let me help you: Click here, here and here.
Over the past several days I have been wrestling with topics for upcoming articles. Ultimately, I decided the best I could offer anyone would be a no holds barred, blunt truth posting regarding my feelings about the U.S. stock market. It is the kind of information and straightforward opinion that I would want someone to share with my daughter, in the years to come, when she begins investing for her future.
So, here goes.
Personally, at this point in time, I do not trust the U.S. stock market. In my humble opinion, gone are the days when investors could do their due diligence and then invest their hard earned dollars in good and reputable companies, while holding onto a reasonable expectation that they would be able to grow a nice little nest egg over time. Today’ stock market resembles more a big and flashy gambling casino rather than a place where the good citizens of this great country (and of countries around the world) can “invest” for their futures. “Playing” the stock market these days is more about gamesmanship than it is about “investing;” and, as most of us know, the house can never be beaten.
My wife and I, over more recent years, have had several conversations about the ways in which Wall Street is destroying American businesses (and America as a whole) by placing unrealistic demands on corporations. For several years she held a high-level position with a large health care insurance company, and during that time she was tasked with listening in to the analysts calls to evaluate them for management. She still recalls the ways in which the analysts grilled company officials, and the many unrealistic expectations they had for future projections for the company.
Certainly, there are some companies whose management teams deserve to be grilled; however, most of us have seen the results of unrealistic analysts’ assumptions. Miss an earnings estimate by as little as a penny and watch your stock price tumble. Say something displeasing to the analysts and get lambasted in the press — then, watch your company’s stock price tumble.
It’s not the way to do business, especially given what is at stake. Too many good people rely on a strong corporate America to provide them with a means to produce a comfortable living — both, during their prime working years and during those “golden years” in retirement. Unfortunately, however, Wall Street has managed to put a lid on the hopes and dreams of many an investor. No longer can people reasonably assume that they will have enough saved for retirement, even though they did everything right during the course of their lifetimes, by working hard and by “investing” for the future.
Looking at the chart above, we can see that the S&P 500 Index (^GSPC) has been stuck in a sideways trading pattern for the last seventeen years (i.e. mid 1996 to today, mid 2013). We can also see that, from 2003 onward, there has been a rise in trading volume, with a significant increase in volume occurring early in early 2009. With that kind of increase in volume, one might expect to see the price action of the SPX follow a similar upward trajectory (i.e, from lower left to upper right); however, that didn’t happen. Rather than following a nice upward pattern, the Index’s price has bounced around like a ping-pong ball. Why? Because Wall Streeters are manipulating the market! (I guess you can now see why I have not won any accolades for my stock investment commentaries — but — as painful as the truth can be, it is always best to be truthful.)
For nearly two decades now the stock market has done very little. Sure, we are now on an up note, but how long will that last? The middle east is about to blow up — big time — we still have millions of people out of work, while many others have had to settle for lesser paying jobs just to make ends meet; and let us not forget the situation with the Fed, the organization that has become the buyer of last resort. Just this afternoon (7/3/2013), I heard that one of the Fed presidents said that the bond buying program could extend out as far as 2015. Really? How much of the country does the Fed really want to own? It’s certainly not what I would consider to be a robust economy, and it’s certainly not what I would consider to be a good time in American history.
Now, having opened this can of worms, I can already hear people saying: “You’re full of (insert your own colorful metaphor here), my account is up 13 percent this year!” And, yes, certainly, there are people who have had this kind of success in the stock market, but who are they and how consistent have their gains been? Are they part of the one percent of our population who are privy to the inner workings of the market, or have they simply gotten lucky?
For the average investor who has a couple of kids, a mortgage or rental payment and a full-time job that must be maintained in order to pay the bills, playing around with individual stocks can be a risky bet. Individual investors lack the time and resources — and the knowledge — to generate any real wealth with individual issues of stocks (at least in today’s stock market). And please don’t be insulted by my ‘lack of knowledge’ insinuation because, put simply, individual investors aren’t privy to the “inside information” that is made available to Wall Street’s bunch of elite (i.e. the one percent). So, please don’t fool yourself into believing that you can compete with these folks, because you can’t — it’s not a level playing field!
If you are an individual investor who truly wants to invest for your future, then dispense with the idea that you can compete with the BIG guys and gals and learn to feel comfortable with the idea of loving slow and stodgy. Spread out your risks by investing in quality, low cost index mutual funds and/or index ETFs and save yourself some sleepless nights. Like people, many companies eventually die off but the indices (like societies themselves) are here to stay; so, look to diversify by investing in the indices rather than in individual issues of equities. Then take that diversification one step further by investing in other types of securities, such as bond funds/ETFs, precious metals and REITS.
And Watch Out For The BIG Sell!
My wife and I have a family friend who recently purchased a new house. Around the same time, her husband found a financial adviser to help them manage their finances (a bit ironic given that the woman works in finance). According to our friend, her new adviser had a rather good year in 2012 (up 5.0 percent for the year) and that he even taught an investments class at one of our local community colleges. Our friend had no mortgage on her first home and she would have been able to pay down a sizeable amount on her new mortgage once her first home sold — however — her financial adviser talked her into giving him the money instead so that he could invest it for her. He argued that he could make more money for her than the ~4.0 percent in mortgage interest payments that she would now have to pay on her new home. Makes sense, right? If she were to pay 4.0 percent in interest payments on her new mortgage, but her new adviser could earn 5.0 percent on the money she makes from the sale of her house, then she will be better off by having him invest the proceeds from the sale of her home — right? Not so fast!
Maybe her new adviser can earn another 5.0 percent this year. Maybe he will earn 15 percent the following year. But, what if he has a couple of down years and loses 50 percent in the two years thereafter, then what? Don’t forget that if a person loses 50 percent in the stock market, it means that that the individual will have to earn 100 percent just to break even: 100 – 50% = 50, but 50 + 50% only equals 75. The investor would have to earn a full 100 percent just to get back to where they left-off (50 + 100% = 100). This is why losses in the stock market can be so devastating — and timely to recoup (i,.e. if they can be recouped at all). Stock market prices always fall faster than they rise and, because of this fact, prices take so much longer to recover. For older investors this can be devastating if their retirement years coincide with a dramatic fall in the stock market. For our friend to do well, her new adviser would have average better than 4.0 percent over the course of her thirty year mortgage. Maybe that’s not such a tall order, but today’s economic and political climate certainly raises some doubts. In my humble, personal opinion, our friend would have been better off if she took a sizeable chunk of the proceeds from the sale of her house to pay down her new mortgage and then took some of the rest to invest in a diversified basket of mutual funds and ETFs. Okay, and “yes,” the interest payments on her new mortgage are tax deductible, but for how long? Presently, there is a serious debate about need to eliminate the deduction in an effort to reduce the Federal deficit. Nice — no? They mismanage their finances and we have to pay for it. Want more on that, then click here, here and here.
The bottom line is this: Be smart with your money and give-up any ideas of getting rich quickly in the stock market. Sure there are some who can do it, but many do so illegally, or with a stacked deck of cards in their favor. Look to diversify, and not just with stock mutual funds or stock ETFs; be certain to look into other asset classes as well. In the end, you heart will reward you with a much more relaxed and normal rhythm.
Notes: Charting data provided courtesy of StockCharts.com.
Disclosure: I do not own any shares of the S&P 500 Index.
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