The Problem With The Stock Market
… is that everyone is in it. If you think Wall Street executives have a lot of power to get government intervention when things aren’t going their way, you should see what happens when the average person’s retirement plans are threatened by falling stock prices! (or so they think)
The stock markets as an investment may be similar to residential real estate market at some point in the future. Of all the major assets you can invest in, residential real estate is one of the most difficult because people spend large amounts of money emotionally in that market and actual investors get pushed around by this. At many times in the past real estate has been an great investment, but once it was decided that it should be a great investment for everyone, it was doomed as an asset class.
The stock market is becoming less of a real investment market, where investors are rewarded for making wise choices. It’s becoming more of a market for hope, big enough that those who make wrong decisions are often rescued at the cost of those who did the right thing. As far back as October 1987, a falling stock market was serious enough to draw immediate government actions.
This will naturally lower returns and take away opportunities for those who prefer to buy at a low price. Higher returns than we’ll see in the stock market can still come from other markets that don’t operate at a large enough scale or affect anything critical enough to get this kind of intervention. Or maybe regulatory attitudes will change in the future and give the stock market its edge again.
That doesn’t mean stocks will have no return since there are good reasons to get good returns on a reasonable amount of capital through business equity. It just means that if we minimize the number of people who really lose, everyone will lose some potential. Just like a market with no short sellers, a market supported by governments hides the true risks and makes everyone pay for the safety (which may not even be real).
This is of course good for a lot of people, since everyone needs to plan to support themselves and access to an investment market that doesn’t eat them alive helps with that. But if we want to guarantee everyone a decent return that return will naturally be lower.
I’m still basing a lot of my plan on the stock market but because of this change in its nature we have to expect lower future returns. And I will experiment with other investments to see what can make the best use of my capital. I’m not sure that we’re buying stocks at their true prices today, and that means we’re giving up some of the returns.