The Stock Market - Is it Worth it? - Part 1
The stock market takes a lot of abuse these days, mostly from people who don’t understand it, or who are trying to sell you something, or both. Words like “crazy, roller-coaster” even “casino” are used to paint Wall Street as a place no reasonable person would want their money. I decided it was time for someone to stand up for the stock market, and remind people of what it is and what it is not. To simplify this discussion, I will use the Dow Jones Industrial average (DOW) to represent the “stock market,” and will assume that all dividends are reinvested.
First of all, as one who loves roller-coasters, I can assure you that no matter how many ups or downs they have, they always wind up right where they started. The Dow began in 1896. If you could have invested $100 on day one you would have over $8,400,000 today. That is certainly no roller-coaster, but if it were I would love a ride. During its 119 years the DOW has seen several wars, the great depression, presidential assassinations, numerous economic crises, recessions and natural disasters, and despite it all has averaged 9.9% annually. Who wouldn’t love returns like that?
Calling the stock market a casino shows a lack of understanding as to how it works. A casino gambler risks money on a random event, but receives nothing of value in exchange for his wager. A stock market investor is literally taking ownership in the companies that provide the goods and services that we use everyday. For example, if you own Apple stock, then every time someone in China buys an iPhone, that transaction puts money in your pocket. If you own stock in the Nevada power company, then those beautiful lights on the strip will remind you of the dividend checks they are providing you. The stock market can be a wonderful opportunity for ordinary people to own a piece of extraordinary companies. Of course with ownership comes the risk that the company may not do well. That is why many investors attempt to spread the risk through diversification.
So if the market has had such a wonderful history of returns, why would anyone not want to have some of their money invested in it? The answer is because, though the DOW has been an amazing wealth creation machine, its short term behavior is unpredictable and sometimes volatile. Investors have to balance their desire, and need, for market returns, with their comfort level with short term volatility. However, I personally believe the fear of volatility is often overblown.
The stock market reflects the economic growth of our nation, and if ever there was a level playing field for all members of society to participate in that growth, I believe the stock market provides that place. Next week I will share what I consider one of the great Myths about investing in the stock market, and the great disservice that myth is to our retiree population….