I used to love the stock market. I loved to research companies and pick new stocks to invest in. I created an entire ETF portfolio for my fiancee’s Roth IRA. I even did some very risky options trading.
I don’t do any of that now. My fiancee and I both cashed out our Roth IRAs for the purchase of our first house. I sold every single stock I owned outside of my 401k for the down payment. Now when you exclude my 401k, I have exactly $0 invested in the stock market.
Your typical financial planner would probably say I’m crazy to have so much of my wealth tied up in my home, Lending Club, precious metals, and a lot of other things that aren’t equities.
I don’t care.
I don’t trust the stock market.
I have a substantial amount of money in my 401k, and that’s all in the stock market. That’s more than enough exposure to equities for me.
But why? People have been making money in the stock market for years. The answer (among many other reasons) can easily be found in my stock market experiment from last year.
Market Experts Don’t Seem to Know Very Much
Have you ever heard a financial advisor or an investor suggest that they can pick stocks better than anyone else? They usually offer very convincing evidence that shows they know how to make money best.
But if they are really that smart, why don’t they stop trying to invest your money, and just invest their own. If they are so confident in the stock market and their stock picks, they could just take out a loan, buy these great stocks, make boatloads of money, pay off the loan and be rich.
But it turns out these people probably don’t know any better than you or me.
Part of my stock market experiment was using the recommendations from “10 money managers, market experts and financial journalists” in this Forbes article. Surely these experts should be able to outperform amateur personal finance bloggers. They should DEFINITELY be able to beat a random selection of stocks.
Too bad they haven’t.
After 18 months, the “experts” portfolio has only returned 20.56%. Compare that to my random picks that have returned 29.16%, the personal finance Money Pros who have 41.15%, and my friend The Hoff who is getting 34.91%.
That tells me that the stock market is nothing more than a gamble. If amateurs and random picks can beat people who spend their lives researching and studying companies to invest in, how much “skill” can there really be?
photo credit: bransorem
My Stock Investment Theory = Wealth Preservation
As I mentioned before, I have a large amount of money in the stock market through my 401k. Unfortunately stocks and bonds are my only options, so I have to put them somewhere.
My goal in my 401k is not to beat the market. My goal is invest in the safest things I can find.
That means investing in non-American companies (because I don’t trust the dollar). It means investing in raw materials as much as possible (because those companies hold real assets that are valuable no matter what the economy is doing).
I will never get rich from the stock market. Lots of people certainly will. Good for them.
I plan to get rich from working hard, getting promotions, and eventually having my own business somewhere down the line. The stock market won’t be a big part of the equation.
Readers: When you want to invest money, where do you put it?
Could be good, could be bad. Nobody knows, which is why I have about 35% of my net worth in equities and another 35% in real estate with the rest in lower risk assets like CDs.
How much do you have in your 401k, what are you investing your 401k and what does your net worth breakdown look like? Is their a net worth mix plan for the future?
I moved a lot of money out of the market recently too. It has been too volatile for me lately. I have about 50% in equities right now. I’ll get back in later because I think we are due for a correction.
I used to think the same way! I saved and invested in bonds initially and then in income property, I bought my first home when I was 27 year old. When I sold all my income property, I started investing in the stock market. I still do not trust or rely on the market, but I spread my risk so my money is working and growing for my future. You cannot dispute that over (over 100 years) time , the stock market has consistently averaged 8-10%. You cannot duplicate those returns easily in real estate or business consistently.
The market has been on the rise lately and I agree is overdue for a correction but as long as Bernanke keeps propping up the market with an influx of $85 billion a month, there isn’t going to be much of a correction. Check out one of my recent posts to find out why.
Welcome back
In your scientific study of random stock picks, what was your margin of error? Also, you’re looking at one year of data, not 5, 10, or 30 years that you could be investing in stocks for.
What was the average stock market return during those 18 months? How do you plan on beating that with your no equities plan?
I suspect there is a substantial amount of non-randomness in the stock market. Enough so that you can actually make substantial amounts of money off of it. I have seen things that look a lot like market manipulation that I could possibly have made some money by taking advantage. Problem is that in order to do that, you have to do a *lot* of study, and spend a lot of time working on it.
…and there is still a possibility of reading the signals wrong, and losing money, so you must have not only guts, but money to back them up.
I suspect the non-randomness is caused by certain groups of people trying to game the system, some of them successfully.
I am starting to get the occasional broker cold-calling me again, first time in nearly 20 years, which I consider a *very* bad sign.. Even back then, my response was always that if they wanted to come play software with me for money, I’d do to them what they would do to me if I came to play stocks with them for money.
I’m more interested in games worth playing where I have some possibility of winning.
I invest in the market and am think that it is important to do so in order to build wealth. I don’t pick stocks or try to time the market because as you’ve pointed out, no one can. If they could, they would own all of the money in the world. I take a passive approach to investing and it has paid off well for me. Yes I lost money in 08, but I stayed invested and had erased those unrealized losses back in late 2011.
As for “safe” investments, the safest investments are those tied to the lowest risk. If the US defaults on its debt and the market drops to zero, then it won’t matter because we have much bigger issues.
I read this article and just had to comment.
If you invest in a diversified portifolio for >10 years (which is the target audience for this blog) then stock equities are your best way to build wealth as a young person.
I agree stock picking is gambling. Market timing is gambling. Investing in the overall health of an entire index (US, international) is NOT gambling. You diversify your risk over a huge number of companies. You WILL see ups and downs, but overall you will see growth over the long term, particularly if dividends are reinvested.
You do also realize that your “safe” securities of gold and real estate are susceptible to the same market forces and speculation as stocks. They might be “real” things, but so are microsoft and apple and the share of ownership that I own in those companies.
The author should wholeheartedly acknowledge that this is not sound investment advice. The “thousandaires” this blog advertises to will stay “thousandaires” by following this strategy into their 40s 50s and beyond.
I welcome debate, but “I’m scared of the stock market” is emotional garbage. Data is key. The historical data says investing in a risk designed diversified portfolio over the long term outperforms other investments.
I was thinking of writing a comment on this thread, but Robert (and Jon above) have said things so well that I’ll just add my agreement – with the caveat that Robert’s advice applies just as well to an audience older than the “thousandaires.” I was immediately alarmed when I saw Kevin busy “picking stocks,” which leads to insufficient diversification and unnecessary risk. Personally, I say one is best off sticking with the dull but successful strategy of buying low-fee index funds that are well-diversified between domestic and international stocks as well as bonds, and starting with a most aggressive allocation in one’s younger years and becoming more conservative with age. The stock market will do whatever it does despite Kevin’s “trust” or lack of it, but historically speaking, it has always provided the best means for building wealth over the long term.
Kevin, For the short term you might be correct, but for the long term you should without question be “betting” on the US stock market. A one year result as you mentioned isn’t long term.
I agree about the stock market not being so cheap right now, but that doesn’t mean I’m not in the market. I recently haven’t been adding to any new position.
What I would recommend is building more of a cash position to buy more stocks/ETFs when things do get cheaper. Being completely out of the US market for the long term (5-10+ years) is a bad idea.
Stock markets are the most unpredictable investment that I have experienced till date. If tomorrow’s news moves the price of the stock, then do you know tomorrow’s news?
Of course this caught my attention because I’m one of the biggest stock market haters in the PF blogging universe. I had lost quite a chunk of money in the stock market during the dot com bubble. Good thing I put the other half into my home. By having a paid off home my savings rate has been pretty damn strong. Too me that has been my greatest investment. I do feel myself missing the boat on all the stock market gains as of late but I remind myself what happened to me the last time I got greedy…
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I always find it peculiar to hear people talk about the merits of long term investing in the equity markets. Not that I necessarily think that they’re wrong, but because most of their assumptions seem to be based on a paradigm that existed 30 years ago. Yes I can pull up charts that show slow steady incremental growth and use that as justification for investing in the market, but this underscores, and in some cases flat out ignores, recent changes in investing. You can attribute current volatility levels to any number of things that are new phenomenons. Whether it’s algorithmic trading, the actions of the Fed, or the introduction of new financial assets that use equities as nothing more than a hedge rather than a long/ short term investment. All of these things taken collectively have created a new dynamic in my opinion that have rendered traditional forms of equity investing mute. The biggest problem as I see it currently, is that unlike 10, 20, or 30 years ago, there is a relative mismatch between investment horizons. current shareholders are no longer long term holders of stock, but rather short term flippers looking for a quick buck. This puts an enormous strain on corporate management because they are in essence forced to only consider the immediate profitability of a company rather then the long term health of their business. The inmates are running the asylum as it were. That being said, I don’t think anyone can hope to accurately predict what the market will do over the long run. Just my two cents.