Investing today is clicking a button. Does the “investor” understand the risks? The website is pretty so it should be good, right?
The Blue Pill World of Investing
It used to be the way to prosperity was to gradually save your money and pay off your debt. You may have invested some of your money in stocks or funds, but the bulk of it was held in safe vehicles such as certificates of deposit (CDs).
Thanks to government-sponsored low interest rates, the system today is designed to dissuade us from saving. Our alternative, whether this was the intention or not, is to throw caution to the wind and put our savings in the stock market. Should be fine, right?
Unfortunately most Americans do think this is fine. They learned about index funds and are told that the stock market always rises – just put your money in every month no matter what and you’re good to go!
This is a blue pill marketing campaign at its finest.
A Look at Average Stock Market Returns
Robo-advisors, investment platforms, personal finance guru’s, financial advisers, etc., say over and over that index investing works because on average, the S&P 500 has returned 10% every year since 1926.
That is true.
But like Rob Isbitts points out in his Forbes article, Why the S&P 500’s Long-Term Performance is So Confusing to Investors, the return on the S&P 500 was just 3.4% per year from the end of 1999 through the end of 2017.
So which is it? 10% or 3.4%?
Both answers are correct. On average, since 1926, the S&P has returned 10%. However, for an entire decade (from 1999 to 2009), the overall return was a negative 24%. Which is why the return from 1999-2017 is only 3.4%.
Americans, especially young ones, are pressured to invest without being properly briefed on its realities.
We are in the longest bull cycle in history. If you watch just one or two YouTube videos on market cycles, anyone will quickly deduce that today’s environment may not be the best time to enter the market.
But investment management platforms don’t have the investor’s interest in mind. They will retort that no one can time the market and should never try, so please, just keep investing every single month (we are a startup and need your contributions!!).
There’s a good chance today’s robo-advisor customers will be the classic “buy high, sell low” investors.
What Happens if the Bull Market Ends?
Right now everyone is making money – the financial service companies, the brokers, the investors, fintech venture capitalists, everyone!
But if and when things go south, it’s the investors, especially those who shouldn’t be investing in the first place, that are left holding the bag. Industry folks and self-educated investors understand the cycles of the market and prepare mentally, emotionally and financially for shifts to occur. The young investors who were just responding to a sleek digital marketing campaign? Not so much.
That said, technology has made it easy for older investors to get in on the action, too. They may have had long careers as teachers or doctors, and don’t understand the stock market. At a time when they should be conservative, they are entering the stock market and not grasping they could lose it all.
Wall Street wins whether the investor wins or loses. The same can be said for Silicon Valley fintech companies. Sure, they have raised their billions and are getting people to invest that never would before — but at what cost?
The Dangers of FIRE
FIRE stands for “Financially Independent, Retire Early” and has hit an all-time popularity. I support the movement and appreciate the philosophy behind it (to live life unchained).
That said, these folks are playing with actual fire in my opinion. And that’s because most of them are die-hard index fund investors. They are retiring at age 35, or 40 and plan to live off index funds forever. They talk about index funds and John Bogle (the guy who created them) in an almost religious tone. Keep in mind that Bogle himself warned about the rise in index funds.
The risk FIRE followers are taking is whether they will be able to secure a job in the future. After several years of not working, it could be tough. And no matter how large a retirement portfolio is, if the market takes a hit, and you’re making withdrawals, there could be a time when it’s not large enough and a job will be necessary.
The concept of early retirement rests on the assumptions that the market will return double-digits most years, and that those returns will continue for the rest of the early retiree’s life.
Investing is Great. Not for Everyone. Not all the Time
The stock market could rise forever and ever and ever…. It’s totally possible because anything is possible. The Fed may never let the US experience a recession again, anything is possible.
The point of this article was just a reminder that you have a choice. You don’t have to build a life around investments, especially if you know nothing about the stock market. FinTech companies put out marketing copy because their goal is to sell you something. Are you struggling with student loans or aren’t sure of your career prospects? Save cash! Cash is wonderful and gives you options and flexibility.
Or consider a self-directed investment account (if we are talking about investing for retirement). Self-directed accounts let an investor direct their funds only into assets they understand – agriculture, tax liens, real estate, etc.
Or use the money you’ve set aside to invest in yourself! Start a business! A side hustle! Create art, travel, take classes, pursue new frontiers. Money is glorious but only if we are using it to enhance our lives, not to enrich those on Wall Street or invest in assets we don’t understand.
If you still want to put money away each month in index funds, go for it. I just request that you mentally, emotionally and financially prepare yourself to lose it.
You give up control when you invest in stock market.