Since Tony and I advocate conservative wealth-building strategies that don’t include using stocks or the stock market, we sometimes get push-back from people who feel they understand the markets and can win at that game.
Let me start by saying that I am friends with several of the best options traders on the planet, so I do know you can make money trading, IF YOU KNOW WHAT YOU’RE DOING. However, I also know the amount of time these individuals have invested to hone their craft, and the amount of information they digest before placing a bet. If that’s you, and you win more than you lose, this article is not for you. Have a nice day with your multiple monitors filled with charts and candlesticks. Really…have fun. 🙂
But, for the rest of us mere mortals, the stock market is usually approached with a buy-and-hold philosophy. Perhaps it’s not always a long-term hold, but it’s not a turnaround measured in days or weeks. The way most of us would invest in the stock market would be through a tax-favored vehicle like a 401k or IRA. Our contributions would generally be invested in a bundle of mutual funds, which would then purchase individual securities with our money.
This is where the crucial decisions are made. Fund managers are your designated stock pickers. You’re trusting their years of experience, large research staffs, and almost unlimited technology resources to make the best possible investment decisions for you.
So, how are they doing?
According to a recent USA Today article, 66% of these high-paid “expert” stock pickers underperformed the average against which their performance is commonly measured: the S&P 500 Index. In other words, with all their resources and experience, these folks couldn’t select a collection of stocks that could outperform an unrefined basket containing all 500 of the top U.S. stocks.
What does this tell me?
It clearly says, “John…if these really smart and experienced men and women, with all their human and technology resources, can’t win in the stock market casino, you sure won’t.”
So when someone occasionally tells me they can do well in the stock market, I know they’re either one of those folks staring at 3 or more computer monitors, watching stock charts and buy/sell signals, or they haven’t yet been smacked by the market demon, or they’re fooling themselves like gamblers do.
How about index funds?
A common response, from people who have some understanding of the “fund manager versus the index” issue, is that an S&P 500 Index fund solves the problem. Buying shares in one of these funds essentially buys that basket of all 500 stocks, so they’ll beat the 66% of fund managers who can’t out-pick the index. True…but.
But, when the overall market goes down, all the indices go down.
How about inverse index funds?
I’m not making this up. The casino managers on Wall Street realized that there is a market of people who believe they can predict when the market will go down. So the casinos began offering inverse funds, which essentially let you bet the opposite way of a market index move. Which means, if you think the S&P will drop in the next week, you could buy shares in an inverse S&P fund that would go up if the S&P 500 index itself goes down.
Cool, huh? Except that, if these funds were the panacea some think they are, wouldn’t the poor 66% of mutual fund managers be jumping into them before each market correction? I mean these folks have the best possible information on which to make their predictions. Wouldn’t they be the first to know?
Which brings me back to the inescapable reality that, if there really was a way to predict the market, the people who get paid huge checks to do that would be using it. The results show that they’re not, so it probably doesn’t exist. And if it does, it’s likely based on “insider knowledge,” which is illegal to use. Ask Martha Stewart.
This is why we advocate investing through a Private Family Bank into alternative investments that are not connected to the stock or bond markets.
If you’ve had enough knots in your stomach when you see your 401k, 403b, IRA, 529 plan, or other stock market based investment lose value, click on the link and get a free copy of my book, The Banker’s Secret to Permanent Family Wealth. Then you can relax and use your monitors to play 3 video games simultaneously. 🙂