Must I Own Stocks?

Mar 7, 2012 by

New York Stock ExchangeAn assortment of facts about stock, or equity, investing:

  • In 2010, U.S. stock mutual fund investors paid an average fee of 0.95%. This included low fee “index funds,” where no one is being paid to pick stocks; rather the fund simply tracks an index like the Standard & Poor’s 500. A 0.95% fee means the fund takes 0.95% ($9.50 of every $1,000) of each investor’s total assets, each and every year, regardless of the fund’s performance.
  • For the 23 years ending in 2009, the performance of actively managed stock funds—again, those led presumably by highly intelligent and trained people—averaged one percentage point per year lower returns than a comparable benchmark, or index. If a benchmark like the S&P 500 index returned 10%, the average managed fund investing in similar stocks would have returned 9%. To put this in dollar terms: $1,000 invested at 10% for 23 years would turn into $8,954. If invested at 9%, the $1,000 would become $7,258, or 19% less.
  • During the May 6, 2010 “Flash Crash,” after dropping 300 points over the course of part of the trading day, the Dow Jones Industrial Average dropped another 600 points—about 6%—in five minutes. Twenty minutes later, most of the 600-point drop had been recovered. No definitive explanation of these events has been published, though “high-frequency” computer trading, also known as algorithmic trading, is generally regarded as having played a key role.
  • According to financial services industry research and consulting firm Aite Group, in 2009 high-frequency trading firms represented 2% of the approximately 20,000 firms operating but accounted for 73% of all U.S. equity trading volume.

I enjoy casinos; in particular the games of blackjack and craps. I’ve studied the games, I know the rules, and I know the odds. I don’t play to make money, and I’m comfortable losing a little money because I have fun playing. In short, I know what I’m doing and what to expect, so I’m happy making an “investment.”

In contrast, I don’t understand the rules of the game on Wall Street. Moreover, I don’t believe anyone on the planet fully understands the rules on Wall Street. Effective regulation is non-existent. The SEC, bless its heart, is pathetically under-resourced, outsmarted, out-lawyered, and out-classed. (These people couldn’t even detect Madoff!) MIT PhDs madly work at supercomputers to outgun the hapless individual investor and institutionalize legal larceny. A merry-go-round of Wall Street kool-aid guzzlers and charlatans shouts the lingo on CNBC, the network seemingly invented to convert the nation to day-trading, pretending to have the ability to forecast reliably stock prices. Financial instruments are invented and traded purely for sport and profit, with no underlying economic utility, no oversight, and no regard for consequences.

The simple and obvious fact is that stock values can and have inexplicably, dramatically, and unpredictably crashed, even when nothing has changed with the prospects of the public companies in which investors have invested. See the summer and fall of 2008. And, in my opinion, the exponential growth of technology and gamesmanship on Wall Street makes such events increasingly likely, and increasingly likely to happen quickly and uncontrollably.

And yet I’m told I’m stupid to plan for a comfortable retirement without entrusting the lion’s portion of my financial assets to Wall Street money managers. I’m told “buy & hold” will be my salvation. We do own equities and equity mutual funds, but these are mostly high dividend generating companies and funds, and not nearly as large a portion of our net worth is invested in stocks as the “experts” recommend for people our ages.

There must be a better way.

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