Small investors fleeing the stock market: so?

[Fish]

According to this article,

Now, as in the wake of the Great Depression, a generation of investors may have become alienated from the stock market.

...

For the most part, investors are eschewing stocks for the perceived safety of bonds and other fixed income assets, trading the possibility of high returns for stability. Bond funds took in an unprecedented $376 billion in 2009 and another estimated $216 billion in 2010 as of the end of August.

The article goes on to mention that 90% of the stock market is owned by 20% of the top income earners. It's only that tiny 10% that is owned by the rest of the populace, so I have to ask ... so what? The vast majority of the money being gambled — and it is gambling — is being played by people with less to lose. That other 10% is likely looking for a long-term investment, stability, retirement, and consistency, because they are the 80% of people without money to burn.

So I have some factual questions about the market itself, as well as some questions for you 'Raffers.

Factual Question: Does that 10% of money actually materially contribute to stability? I quote from the article, "by shunning stocks they may also be helping to create precisely the kind of stock market that ordinary investors rightly detest: one driven by day traders with low volume and prone to sudden reversals in direction." It almost sounds as if that the journalist is saying you idiot public, if you gave your money to the stock market then we'd all enjoy some stability! Give us your money and the rest of us gambling fools wouldn't lose quite so badly. Is there any truth to that? Because I'm inclined to say it sounds like the desperate accusation of a gambler who needs more to gamble with, blaming the market's instability on the people who want stability, and begging them to bring their chips back to the table. My (admittedly non-market-savvy) impression is that you don't want to be the poor, unskilled, risk-averse player at the poker table crammed with card sharps, because they're richer than you, they can take bigger risks than you, and you're gonna get fleeced. Aren't these the same people who wanted Medicare privatized so they could gamble with that money too?

Personal Question: Do you think the ordinary person should be bothering with stocks? Will you bother with them, as opposed to longer-term investments like bonds and CDs? I know that I put in some money in 2000, and it's still not back to the level I started at, after ten years. It's about 40% of the total I originally invested. That is not what I call great incentive to dive back into the market.

[mswas]

Those who own the stock are the Patricians and those who do not are the Plebes. The stockholders are the rulers of society.

[Fish]

That'd look great on a bumper sticker, but it doesn't address the OP.

[Wolf Larsen]

This is a great development. The stock market goes through a long cycle of under and over valuation. We've been in a long over-valuation cycle since the middle of the '90s. At some point stocks will be declared to be dead and gone forever. That is exactly the time to go all in and hang on for the next 20 year bull market. Fortunes will be made when this happens. And lost when all the people who went in to bonds find out what happens to bond prices when interest rates skyrocket.

I am seeing evidence we are moving towards this, but we're not there yet. In the mean time I am building cash and watching PE ratios and dividend yields.

Wolf Larsen - Stock Geek, Patrician

[Wolf Larsen]

To answer some of the other points:

The securities markets are nothing like a casino. In a casino all the games are set up right from the get-go so that you will lose on average. If you keep playing you will lose all your money. In the securities markets you can find everything from guaranteed inflation protected returns (US Treasury TIPS) to high risk/potentially high reward things like small pharma startups. There are many strong companies that pay good dividends that unless bought at an insane market top pretty much guarantee moderate returns over the years. Careful study of business and investing can tip the odds greatly in your favor.

Everyone should own securities as part of the their retirement. For the average investor the best plan is what is called Dollar Cost Averaging. You put a fixed sum every month into either a low cost mutual fund (Vanguard has some great ones) or a low cost ETF that tracks the broad market. You do this month in and month out and when you get a raise you add some of the raise to the monthly investment. Over a lifetime this builds wealth.

For the more enterprising investor who is interested in the market and how it works a program of study can yield great benefits. My favorite example is a woman who built wealth on a modest salary. She only bought stock in companies that had products that she personally used and considered to be superior. She also did careful research into the company, its management and prospects before investing and was very price aware. (If it was a good company, but too expensive she waited for a market downturn to buy.) When she died her estate was worth over 7 million dollars.

[Fish]

Originally Posted by Wolf Larsen

The securities markets are nothing like a casino. In a casino all the games are set up right from the get-go so that you will lose on average.

I read somewhere that managed funds often perform less well than the market index. Overall, a random selection of stocks may earn 5%, but the funds managed by the company you paid to grow your wealth only earned 4%. That suggests to me that a) they're not very good at picking stocks, or b) they're using the investors' money as a lever to make profit for themselves.

I've also read that it's not uncommon for a person to invest money into Outcome A, but the brokerage immediately puts an equal amount of money into Outcome Not-A. When you add to that the fee the investor paid — which he pays whether or not he gets the outcome he wants — then it is very much like the house in a casino, who wins no matter what. They may only break even on the investment itself, so they are assuming only small risk, but they walk off with the fees their investors pay them.

[hajario]

Unless you want to make studying the market a hobby, you are best off doing what I do and that it put your money in an S&P500 index fund. That is what I have been doing with my 401k/IRA for years and I have done fine by it. (This is pretty much what Fish already said but with fewer words.)

[mswas]

Originally Posted by Fish

That'd look great on a bumper sticker, but it doesn't address the OP.

It does actually address the OP. It addresses it directly.

The lack of small holders holding the reins of the economy means the economy is controlled by a small number of people, who get to basically make up all the rules that the rest of us have to live by.

[mswas]

Originally Posted by Fish

I read somewhere that managed funds often perform less well than the market index. Overall, a random selection of stocks may earn 5%, but the funds managed by the company you paid to grow your wealth only earned 4%. That suggests to me that a) they're not very good at picking stocks, or b) they're using the investors' money as a lever to make profit for themselves.

I've also read that it's not uncommon for a person to invest money into Outcome A, but the brokerage immediately puts an equal amount of money into Outcome Not-A. When you add to that the fee the investor paid — which he pays whether or not he gets the outcome he wants — then it is very much like the house in a casino, who wins no matter what. They may only break even on the investment itself, so they are assuming only small risk, but they walk off with the fees their investors pay them.

Yeah, that's called hedging. That's what hedge funds are for.

[hajario]

Originally Posted by hajario

(This is pretty much what Fish already said but with fewer words.)

It was actually Wolf Larsen who said that. My apologies.

[Wolf Larsen]

Managed funds do generally underperform. Which is why the very low cost market trackers from Vanguard and some of the ETFs are the way to invest in the broad market. But read the full fees and charges disclosure, some aren't as cheap as they look.

[teela brown]

Originally Posted by Wolf Larsen

. . . My favorite example is a woman who built wealth on a modest salary. She only bought stock in companies that had products that she personally used and considered to be superior. She also did careful research into the company, its management and prospects before investing and was very price aware. (If it was a good company, but too expensive she waited for a market downturn to buy.) When she died her estate was worth over 7 million dollars.

Hey, that was me!

::Looking at account balances::

Oh, wait, no it wasn't. It was Anne Scheiber, right?