According to a Marketwatch.com article dated August 13, 2014, the “Average Investor” has earned approximately a 2.4% rate of return over the twenty year period of 12-31-1993 to 12-31-2013 on a 20 years annualized basis, barely beating inflation.
This shocking statistic is eye-opening and reflects the inability of most investors to remove or minimize emotionally driven behavior to sell low and buy high. The importance of including alternative investments in ones portfolio is very clear.
1. High frequency trading comprises between 50-70% of all trades on the exchanges. This new development, totally destroys the “buy and hold” tactic followed by many investors and represents the biggest threat to investors in the stock market. It is virtually impossible to compete with super computers that have the ability to “predict” movement in stock and commodity prices. It is impossible for the typical investor or retail investor to compete with the overwhelming resources of the hedge funds and investment firms that conduct high frequency trading. Ignorance of this reality is harmful. Michael Lewis, author of a recent best-selling book, “Flash Boys”, has declared that the market is rigged. 60 Minutes conducted an extensive interview of Michael Lewis exploring the world of High Frequency Trading and its effects on common investors.
2. Insider trading is rampant. The SEC is struggling to pursue a minuscule percentage of the insider trading cases.
3. Hedge funds and the big investment banks, have massive resources to get better information than you or I, and much faster. Goldman Sachs’ preferred clients got private shares of Facebook, did you? Do you actually think you can out trade the professional traders who work for the top hedge funds and investment banks? The four major money center bank in the US have HFT (high frequency trading) operations and they did not have a loss on any single day!
Wall Street experts like Jim Cramer said Bear Sterns was a Buy, one week before it totally collapsed, then he told Today show viewers to “sell it all!!!” if you needed your money over the next few years. Perhaps he had a big short position on the market that day. Many people foolishly believe that a two second sound bite – buy, sell or hold – is a good way to make critical financial decisions. The stock market is simply impossible to predict and too risky for most investors. The most prominent “experts” can’t predict markets so who can?
4. Most investors do not have the emotional discipline to hold their positions during market downturns. This is very hard to practice and everyone is prone to impulsive trading. The annual rate of return realized by the average American stock market investor is so low because of the tendency to sell low and buy high.
The “flash crash of 2010” demonstrated the level of risk in the market as it dropped 1000 points in 15 minutes. Your 10% stop loss order would not hold up in that kind of scenario. High frequency trading is widely believed to have caused this crash. Your stop loss limit on your Charles Schwab account would not hold up against the HFTs.
GAAP accounting standards do little to protect the interests of investors, think Enron. Enron’s accounting was GAAP compliant, yet the 12th largest company at the time, collapsed and investors were wiped out. GAAP = “generally accepted accounting principles
6.The equity market is totally unpredictable. It is clearly impossible to predict the direction of publicly traded securities with any kind of consistency.Cite the two times when the market was sideways for nearly 20 years. The historic levels of volatility clearly indicate the risk of the stock market and most investors just cannot tolerate this level of speculative risk and have no business being gamblers. The stock market was flat from 1929-1959. & 1960-1980 ????? Could you withstand that kind of scenario? It could happen again. The S&P 500 from 2000-2010 was essentially flat.
7.Retiring Boomers withdrawing from the stock market to finance their retirement, will sink the markets! An article in Bloomberg dated (8-22-11) points out that “Baby Boomers Selling Shares May Depress Stocks for Decades. Aging baby Boomers may hold down US stock values for the next two decades as they sell their investments to finance retirement, according to researchers from the Federal Reserve Bank of San Francisco.
92 million baby boomers are expected to face significant headwinds with their retirement portfolios due to demographics. There will be a 180* shift in the ratio of retiree to workers from 1 to 10, to 10 to 1 in about 10 years according to Robert D. Arnott., portfolio manager and researcher. This means there will be 10 retirees for every new worker in America. The retirees will not have many workers to sell their stocks to, in order to finance their retirement.
Moody’s, Fitch, S&P – the rating agencies can’t be trusted. The testimony by a former executive at Moody’s declares that there is an undeniable conflict of interest. The rating agencies are paid by the very companies they are rating so what do you think the chances are that objectivity exists?
There will always be Bernie Madoffs and Jordan Belforts of the world lurking to prey on the uncontrollable greed of desperate investors. Resist the temptation however slick or convincing their sales pitches. Always recognize the dangers of speculation, whether you are dealing with financial assets or real assets. Beware the blood thirsty sharks, wolves and slick con artists waiting to take your money. Let’s not forget MF Global and the mysterious disappearance of over $1.2 billion dollars in securities!!! Amazingly, former governor of New Jersey, John Corzine has never been charged for criminal liability!
Better returns can be found with less risk in other types of investments. Commercial real estate, private lending, note investing and oil and gas partnerships are some examples of assets that earn income now with less volatility.
Sir John Templeton, the famous investor, advised people to not trade frequently or speculate, but to buy securities and hold them for the long term. Warren Buffett holds on to his equity positions for many years, decades even. Most baby boomer investors close to or in retirement are not in a position to wait decades for their portfolios to grow.
James Altucher accurately points out that the best stock market investors either hold their positions for a very long time or in the case of the High Frequency Traders, a few milliseconds.
You are committing the speculation sin when you are putting your money in an asset with “hopes” of making a gain by selling for more in the future. Instead, look for assets that earn an income right now. Look for assets that earn a good cash flow now and also have upside opportunities as well. I wish I learned this simple lesson many years ago. Stop the gambling, stop the speculation, it is not the best way to invest.
I am not suggesting that there is no role for speculation or stock and bonds in your portfolio, but I am saying that it should not be the central or main part of your investing strategy in retirement.
What is the point of reading all the personal finance books that essentially say the same things. Buy no-load mutual funds, buy index funds, use asset allocation, dollar cost averaging, join a MLM, buy commodities, trade foreign currencies, buy rental houses, or foreclosed homes.
The primary negative feature to all of the above mentioned “investments” is that they are all speculative and their values will be unpredictable. Why gamble?
What if you could invest in an asset where you did not have to rely on fortune telling to figure out whether an investment would perform or not? Isn’t that what most people do when they invest in the stock market? Mutual funds, gold, currencies, some kinds of real estate? What if you invested in something that was performing currently and earning cash flow right now? Imagine taking the guesswork out of your financial future.
When is it appropriate to speculate or invest in the stock market?
If you have the stomach or “risk tolerance” to endure the typical market volatility.
If you can afford to sustain massive losses.
If you have a large amount of investment capital, and have the ability to invest with several hedge funds that have HFT (high frequency trading) operations. HFTs rarely ever lose money.
If you are on Goldman Sachs’ list of preferred clients who were invited to purchase private shares of Facebook before they went public.
If you have exceptional skill or knowledge as a trader. Most investors are unskilled or unfamiliar with trading tactics, playing with options, going “short”, etc.
If you have the ability to withstand very long periods of time with either high volatility, or perhaps a flat market.
If you have money that you are comfortable losing, money that if you lost it it would not affect your living standard.
Finally, if there is any possible way you can figure out what “Blue Horseshoe” loves.
In Investment Advice, Stock Market Trading, The Average Investor, Smart Investing Tags High Frequency Trading, Stock Market, Insider Trading, Hedge Funds, Investment Banks, Jim Cramer, Bear Sterns, Emotional Discipline, Flash Crash, GAAP, Equity Market, Retiring Boomers, Moody’s, Fitch, Standard&Poor’s, Bernie Madoff, Jordan Belfort, Returns, Sir John Templeton, Speculation, Goldman Sachs