When talking with friends or people who know of and/or read Financial Methods, the stock market is always a hot topic of conversation. When people think of finance in general, they think of the market.
That is all well and good, but honestly, how much does the daily activity of the market affect your personal finances? I can tell you that for me, the swing (upward or downward) in any market on any given day does not affect me. There are very few people who can successfully “day trade”. For the silent majority who are being conned into thinking that constant trading and evaluation of your portfolio will make you rich, good luck with that.
Financial Methods is not about quick return investing or finding today’s “hot stock”. It is here for those who want a better understanding of money and how it works for the average person.
Stocks Can Have Schizophrenia-
You never really know how a particular stock will act from day to day. Great news can make for a day of tremendous gains. Terrible news can do just the opposite. And sometimes a stock will plummet or skyrocket with no news regarding the company at all. Schizophrenia is a strange disease. Some days, people with the schizophrenia seem like they have no ailment at all. Other days, you could not predict their behavior from one minute to the next.
One Bad Day Can Destroy a Stock-
Enron, WorldCom…you know the names. For the “normal” investor, these companies were safe and sound. Little did investors know that the crash was coming. Individual stock investing CAN be done safely and efficiently, but not easily. Taking the risk of putting too many “eggs in one basket” can destroy you financially, and in turn, perhaps personally.
Too Dependent on Luck-
I like to gamble, but I prefer to gamble on games that I have some control over, namely poker. Without a constant flow of information, frequent repositioning and research, the perfect stock is impossible to find. Playing games with a small, controlled amount of money is fine, but when my financial future may depend on it, I’ll say “thanks but no thanks” to stocks.
Alternatives-
If (like me) you are uncomfortable and too wary of purchasing stocks to invest in, what are the options? My answer is funds. Index and Exchange Traded Funds (ETF’s) provide more stability, less risk, and returns that are potentially as much (or even more!) than stocks.
Regardless of your views on individual stock investing, you can not deny that the alternatives to individual stock investing, in the long-term, presents less risk. Some people do very well picking individual investments. Far be it from me to tell you that you are doing something wrong…but that is why I titled this post the way I did. If it were me telling you that your methods of investing were wrong, I would be ignorant.
{ 4 comments }
MattB,
Not investing in stocks is somewhat limiting and not investing for the reasons above is being a little harsh.
Schizophrenia: Stocks are much less schizophrenia in the long term. And most assets (including T-Bills) can be manic-depressive on a daily basis.
One Bad Day can destroy all sorts of financial assets (less likely for commodities), including bonds (although less likely for US government bonds). It is bad advice to view all stocks through the prism of Enron and Worldcom – these were low probability events and most people avoided them or had low exposures to them.
You are likely to have as much control over poker games as the stock market. The odds in poker are not pre-defined since they depend on the behaviour of other players and so the possibilities are infinite, somewhat like the stock market. Readers of my blog will know that the so-called Ludic Fallacy doesn’t apply to poker.
So, we should encourage people to at least try to see are they good at investing in stocks. One of Wall Streets great tricks of recent time has been to convince the ordinary investor that it is “impossible” to invest effectively in stocks so, magic, why not take some ETFs. Mutual fund managers don’t exactly blow the lights out, so why should ordinary investors be much worse.
Learning to pick stocks is an important part of learning to invest, and should not be ignored.
But by all means, don’t go all-in (bet the house on) single stocks or small numbers – a good poker player never would.
While I do agree with some of your points, this is why I titled the article Why I Do not invest in stocks…I’m not speaking for the majority, and never intend to. That said, I am speaking mostly of people who are looking for the next “big thing”. If done intelligently with proper diversification, risk is minimal and success is likely. Unfortunately, most people I know do not have the time, resources or knowledge to do it right.
I apologize if this post comes off as cynical or mean. I just do not believe that individual stocks are for the everyday investor. There are many other options that can boast solid returns with less risk, that is my preferred investing method and therefore the reason I recommend these methods.
Thanks for sharing such great post, I totally agree that one bad day can destroy a stock and if you still want to invest then diversification of stock and proper knowledge about market is very much essential.
I put the same amount of money into CD and mutual funds and my return has been better on my CD the last 6 years.
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