The stock market works on the greater-fool theory, you buy something in the hope that you can sell it to someone else for more than you paid. Even in good times it doesnt always work, as there are shortages of fools from time to time. What retail investors dont see is that the days when technology shares were rapidly moving up and creating wealth for their founders and those that bought early enough and held for a few years are long gone. So, if the conditions for easy money are gone, such as an abundance of fools with money, why are you still invested?
I think the answer is that the retail investor has been consistently lied to about long-term investing and wealth building in the stock market: specifically that holding stocks for the long-term is common sense. Its not common sense; its been disguised as common sense. Let me explain: Most retail investors have no business being in the stock market, they got in due to going along with the belief that it is a good way for them to build wealth and prepare for retirement now, and now is the only time that matters, because if you lose your money now in the market there may not be a later to make it back. As a precaution, wouldnt it be wise to sell investments that you do not know enough about? If you sell and your stock holdings significantly decrease in value you will be better off mentally, emotionally, and financially and you still have a chance to buy those stocks back cheaper. What this means is: If you sell now you have a choice! If you hold and your investments lose substantial value and do not recover for many years, whos going to bail you out? If you sell and the market recovers with more fools and stock prices go up you miss part of the move, but it will not make you rich even if stocks go up, it will not make you secure about your holdings if the market goes up, it will only matter if your particular stocks go up very, very, very far. And how likely is that is that, especially if you didnt benefit during the easy money of the tech bubble? If you sell, and the stocks you held go up, you still have a choice to buy them back, and most importantly when those stocks are going up, thats at least proof that there are some fools going into them. The worst situation is to find out that most of the fools are out and youre stuck with stocks that arent worth much to most of the remaining buyers.
Fortune magazine published an article online titled, What investors should do now, but Fortune doesnt get it, its not about what they think, its not about fundamentals its whether youre invested for the right reason to begin with. The Fortune magazine article clearly states: We dont think the financial system is on the verge of collapse. Fine. Neither do I. That is not the point. The market fundamentals arent strong, and there is no instant way to change the market temperament to the euphoria of 1996 to early 2000. It is in those exceptional periods where it is possible for the unsophisticated retail investor to make large sums of money. But getting back to the article it states: By our count some 300 articles were published last month telling investors dont panic or not to panic. Urging calm is one thing. But too much soothing talk implies that there are no lessons to be learned. Whats the use of a vertigo-inducing bout of market turbulence if the only conclusion is stay the course?
Stay the course? The course hasnt been good for you for quite some time. If the road youre on doesnt appear to be getting you to your destination with your financial vehicle in good working order, get off that road. For the past fifteen years youve heard promises that youll be well off with long-term investing. Promises from institutions that took your money, promises injected into the media, but if your holdings go down substantially and stay down for years, have you been promised anything other than bearing the burden of the risk. The media and institutions will not pay your bills and you think theyll share in your losses? The 300 articles telling you to hold on is a warning sign they need time to get out first!
Heres the best part of that article: Heres another reason to be concerned: The professionals managing your money havent gotten this market right. Consider that at the market low on Sept. 17, only five diversified U.S. equity mutual funds – out of a universe of 9,100 – had positive total returns for the year, according to Morningstar. FIVE! Even after the market rebounded, there were still only three funds with returns this year of 10% or better.
Did you get that youre risking your life savings for a 10% return? Good luck, the important thing to remember is that even if the stock market declines and stays down for an extended period the rich people will still be rich, perhaps less rich, but what about you? No one is going to bail you out of picking the wrong funds or stocks and diminishing your capital. A few funny books that kind of relate (Expert stuff):Bailout shirt: (found on page 3)