Hoping the stock market will come back response
Big Money Tony made a comment to my post titled “Hoping the stock market will come back” which I felt deserved a full post as a response:
BMT, I have two points to make regarding your comment:
First is that you seem to think that the only investment choices available are stocks, real estate, and savings accounts. If you look outside of “traditional investment vehicles” as you put it, you’ll find a wealth of Exchange Traded Funds (ETFs) available to the average investor that allow people like you and me to take advantage of both the long and short side of a range of investments simply by buying shares of the ETF through a brokerage account. For example, you could invest in commodities such as gold and oil by purchasing shares of GLD and USO, respectively. If you think that the long term treasury bond market bubble is about to burst, you could buy shares of TBT, whose price is meant to track “twice the inverse of the … U.S. Treasury index” which means that it goes up when bond prices go down. (Full disclosure: while I am not a broker or investment advisor, I do own shares in the above mentioned ETFs).
The second point relates to the bigger picture of “the thing I can not get over is that if you eliminate stock market climbing as wealth building, there is not much left to build wealth on.” This takes me back to my original point about waiting for the market to come back: you and I are not going to get rich off of our investments. It became the American dream in the late 1990s to be able to live off your investments, and I don’t doubt that some people are fortunate enough to do so, but it just isn’t realistic for the vast majority of us. Your statement of “what’s left is lottery or plain hard work in a small business” is correct. There is no get rich quick investment out there.
My investment focus has shifted from “wealth building” to wealth preservation. I see wealth building through investing as no longer being realistic and am more concerned with simply preserving what I currently have. While it may seem easy to preserve wealth simply by putting your money in a savings account, I don’t see it as being that easy. The U.S. dollar is NOT a store of value, as its value is continually being eroded by central bank quantitative easing and spiraling national debt. Which is why the purpose of investing your money in assets (whether they be stocks, real estate, or gold) is simply to preserve wealth rather than to build wealth.
From inside a rock, out comes a monkey 
Big Money Tony replied:
Thanks for the new post. I feel pretty important that I’ve generated 2 posts on your site!
Sure, there are other investment vehicles. But things like ETFs might be out of the reach of others. Common stocks are difficult enough, ETFs become a bigger deal. I’ll be honest, I haven’t fully watched CNBC in awhile and let my Wall Street Journal subscription lapse over a year ago, so I haven’t had the luxury of looking closely at ETFs. If I recall correctly, the big “growth” of ETFs came when popular mutual funds “closed” themselves to new investors. The only way new investors could participate was to buy them over the open market from existing fund holders, creating a sort of tracking stock. That, I’ve never been a fan of, but that’s another story. The other ETFs you mention are fine. Gold and oil remain good commodities since gold is a sign of wealth and oil of course runs the world. But in my opinion, ETFs are too far out of reach for the average investor. Not because they can not afford, but they do not understand. Like mutual funds, over time that may change.
There is no get rich quick scheme as you put it. However, proper investment in common equities can generate moderate wealth. Yes, the years of 100%+ return are gone, but an average gain of 5-10% over time works. I used bad terminology when I said wealth building. You do need to perserve wealth before it can be built. That is why brokerages ask about your investing experience. My broker knows I know the market and suggests riskier and more complex vehicles. My sister, at the same brokerage, is offered traditionally safer investments. Good brokers do this. Average or bad ones, simply see it as a checked box. Unfortunately that is most of them today.
One thing we definitely agree on is that the market can not really build wealth. If the average investor thinks they can strike it rich in the market, they need to be very lucky or very rich already as it is unlikely to happen. However, there are some who can and will, but they take a risk much higher than anyone should.
June 19, 2009 2:12 pm at 2:12 pm. Permalink.
bobsala replied:
I have to strongly disagree with you about ETFs. ETFs are not out of reach for the average investor – the ease of investing in a range of financial products through an ETF is their strength. Think of ETFs as mutual funds that trade on a stock exchange, which means that you can trade them the same way you trade a stock. Do ETFs have hidden fees and sometimes additional risks not associated with a typical stock or mutual fund? Sure. But ETFs have opened up numerous investment opportunities for individual investors that previously were only available to institutional investors.
June 20, 2009 10:06 am at 10:06 am. Permalink.