The stock market is not a place for most folks to put money to get rich because in bad times you lose and in good times the average investor makes a small return. When you lose money on your investment fund, all those great advertisements that lured you with the presumption that you will compound your way to wealth go out the window the ability to come back from a large loss requires very high rates of return for consecutive years. And when economic conditions are poor, or if market conditions are perceived to be poor for many years due to a lack of earnings improvement the market continues to value your holdings for very little and your capital is tied up in waiting to breakeven. But that is not investing, that is hoping.
When the golden eggs run out is an article in the December 6th 2008 issue of the Economist that states a few important points to consider:The stockmarkets decline this year has been so steep that it has erased all the gains made in the rally from 2003 to 2007. In late November, the S&P 500 index dipped to its lowest level in 11 years.An American who puts $100 a month for the past ten years into the average equity fund would have accumulated just $10, 932 – $1,068 less than he invested. Even a balanced fund (one that mixes government bonds and equities) would have lost money. A European who invested a flat amount every month for the past decade would have lost almost 25% of his money.The average diversified American equity fund is down 41% for the year.
Let me make my point: Long-term stock market investing is not a guarantee of wealth, it is a game of chance, and when played properly, with the understanding that it is simply a game of making money by being able to sell what you paid for at a higher price you can focus on a better approach that has a chance to produce wealth. The stock market requires fresh buyers, without people willing to pay more for your holdings the game leaves behind those who hang on to their holdings and values the holdings for less and less, if and until new buyers come along. The most important consideration in the wealth creation game is not the investment – it is the approach. At some point your holdings may reach an unsustainable high value, and that luck should be cashed in. The dotcom bubble was about quick wealth, and once the bubble burst there hasnt been the same kind of chances for quick and relatively safe risk-taking to accumulate wealth. The people that bought a little of a few different tech stocks missed the main chance of the wealth game, those investors needed to load up and be ready to dump their holdings before the tech bubble burst or as the market was valuing their holdings for less while the market was shifting downward. As long as there was a flood of buyers coming into the game and in particular focusing on tech stocks, a fortune could be made, but it is a relatively short-term approach with long-term beneficial results if you were able to play the game correctly. When stock market investing was presented to the average person (it was generally a game for the rich up until twenty-five years ago) the media repeated a lot of foolish things, that long-term investing of even ten to twenty-five years will produce good returns and that diversification will prevent catastrophic losses of capital. Investors today see this is not true.
From the same Economist article: In demographic terms, asset markets could be seen as a pyramid scheme, in which each generation aims to sell their savings to the next. Provided the next generation is larger than the one that preceded it, the savers can sell their assets at higher prices. That was the case for much of the 20th century. The baby-boomers will upset the pattern. If they retire at 65, they will start offloading their assets in 2011. And even in America, which has fewer demographic problems than in Japan, there are not enough new savers coming along to replace them.
What Im saying is cheap stocks tend to get cheaper. You have to understand: Is there any reason someone will pay more for my investment? If nobody wants it, it doesnt matter that you bought in during an early stage, it only matters when or if other buyers come along to increase the value of the investment. New buyers decide the value. And if earnings arent going to considerably improve, there may not be pressing reasons to believe your particular holding will increase in value long-term investing is only efficient and effective when stock prices are rising. Anything else isnt helpful. The stock market will continue to slip or can continue to fall until most of the players trying to make money are washed out of the game. I dont have a reason to believe that this is the bottom. Why are the DJIA and S&P 500 still relatively high if the economic climate is supposedly worse than its been in many, many years? The DJIA was around 1000 in 1980, and it had begun 1973 at 1020. And in the bear market of 1973-1974, growth funds lost 46.4% on average, and some funds lost between 25% and 45% in 1973 and then lost a similar amount the following year! Sure, history doesnt repeat itself in the exact same way, but the idea is clear you need to decide where you are in terms of your overall accumulated investment capital over the years, figure out a breakeven point and decide on a stop-loss point to protect yourself from losing it. Some investors may not have been productive with the last ten years of investing and now have a roughly ten or eleven percent loss, but cap that loss, because at least you can recover from a ten or eleven percent loss.
From the same Economist article: For Japanese equity investors, it has not just been a lost decade, it has been a lost quarter-century; the Nikkei 225 average recently touched a 26-year low.
The investment community got you in, and if you are still holding and hoping you may be overlooking the possibility that your capital went to upping the value of something that perhaps someone else had the foresight to cash out on.