Is the stock market a dangerous place to be right now? In my judgment, it’s more dangerous to be out of the market than to be in it.
A recent book by Robert Kiyosaki and Donald Trump, “Why We Want You To Be Rich,” says that the stock market is a lousy place for people to put their money. The book has a number of contradictions and it isn’t completely clear to me what the authors are recommending. At the risk of over simplification, they suggest that owning a business, real estate and oil and gas partnerships are the way to go if you want to be rich.
Undoubtedly, a lot of money has been made and more will be made in the future through owning businesses, real estate and oil. It is equally true that these are specialized investments that require a fair amount of expertise before laying one’s money down. Untold millions of folks have lost their shirt investing in these areas.
Considering the possibilities
So, why do I think the stock market a better deal for most people than Kiyosaki and Trump’s recommended investment venues? Let’s start with owning a business. Statistics vary, but somewhere around 80% of new businesses fail within the first three years. That’s 80% who lose everything and spend years paying for their misadventure. I’m not trying to discourage anyone, but facts are facts.
Oil investing is an extremely complex venture. While not accusing anyone of anything, the history of oil investing is rife with fraud, misappropriation of funds and downright theft. It’s not a straightforward proposition. Drillers, landowners and dealmakers often have an agenda that doesn’t include making their passive-investing partners wealthy.
We all know that success in real estate investing is all about location, location and location. I would also suggest that it’s about having the financial staying power to weather vacancies, repairs and renovations. Not only can these necessities interrupt your flow of income, but may, in fact, require huge capital infusions to keep the deal alive.
Real estate, oil and small businesses all lack of liquidity. You can’t just turn your investment into cash on short notice. Sometimes it takes years and years to sell an interest in one of these investments. Plus, unlike other types of investments, participation in any of these three areas means that you’re in that business and not just a sideline, passive investor.
Back in ‘72…
Now, for contrast, let’s look at the stock market. I bought my first share of stock, actually it was 10 shares, in 1972 and haven’t been out of the market since then. I’ve learned a lot about stock market investing over the last 35 years. Here are a few things I strongly believe:
• You can’t time the market by getting in and out based on your instincts as to whether the market is going up or down. You’ll fail if you try and you’ll miss out on all the big swings, both up and down. If you’re going to be an investor, get in there and stay.
• Non-professional investors can’t consistently make good stock picks. Most novice investors should stick with a diversified portfolio of mutual funds and leave individual stock picking to the pros. Remember WorldCom? Or Enron?
• No one should be 100% invested in stocks. Fixed income investments, like bonds and preferred stock, lessen the volatility of the portfolio and provide a good measure of stability. Depending on the investor’s age, fixed income investments should be between 25% and 60% of one’s portfolio. True, you miss out on some profit from market surges, but you’ll also miss out on some of the drops.
If you’re lured toward oil and real estate, pick mutual funds that include a diversified mix of companies operating in these areas. Real estate investment trusts (REITs) offer participation in the real estate arena, plus they provide liquidity for the investor. They are an excellent choice for a part of your fixed income portfolio.
It’s a calling
Owning a business is a calling, not an investment. It looks easy, but that’s far from true. The lure of being the boss and ordering folks around can be deceiving.
Owning a business requires tough choices that aren’t as much fun as it might appear. Plus, if things go wrong, the owner has to stand up and take the fall.
Should be enough…
So, in summary, the stock market will yield somewhere around 8% to 10% profit year after year with little risk for the long-term investor who maintains a diversified portfolio across the entire economy.
Realistically, that’s about all any of us are going to earn from passive investments and, if you invest regularly over the long haul, it’s enough.
In fact, if a young person commits to saving 10% or more of their income over their working years, they can be rich by the time retirement rolls around. Thus, all of us can be financially well off if we just practice a little discretion in our financial lives. v
Thought for the Moment
Shun idleness. It is a rust that attaches itself to the most brilliant of metals.
— writer and philosopher
Joe D. Jones, CPA (retired), is publisher of the Mississippi Business Journal. Contact him at firstname.lastname@example.org.