Is the Stock Market Ripping You Off?

08/22/2011 1:22 pm EST


Terry Savage

Author, The Savage Truth on Money

Well, for investors who are truly focused on a long-term plan, the market hasn’t ripped anyone off in 85 years, but you’ll need to keep faith in the plan, writes personal finance expert Terry Savage.

Are you thinking that maybe the stock market is a “ripoff” and a “scam?"

Those are some of the terms I’ve seen posted on the Internet, as angry investors are paralyzed with fear, confused about what to do now, and worried about the future of our country.

You’re not alone if questions like the following are running through your mind:

  • How did they drag me into this?
  • Since when am I supposed to be a stock market investor?
  • I have enough problems just worrying about my job. Can’t we go back to the “old days” when I could count on a pension and Social Security for my retirement?
  • Who came up with the idea of a 40l(k) plan, which requires me to make investment choices?
  • And is there any rational way to make investment decisions in a market like this?

Those are just some of the questions facing ordinary people, who never claimed to be "investors"—but are now watching their retirement funds melt away. Let me try to deal with some of those issues and fears:

Is it the End of America as We Know It?
No one has a crystal ball, but in times like this it’s useful to learn from past experience.

America has been through tough times before—although none were exactly like these times. We made it through the Depression—although then the government could spend freely on public works because we weren’t in so much debt.

We made it through the oil price shocks in the 1970s, because the Fed created money to cushion the blow. We made it through the resulting inflation of the late 1970s, because the Fed had room to raise interest rates and quash inflation expectations.

We made it through the tough recession of the early 1980s, because a new technology boom, and tax cuts, created incentives for growth and change.

In each case, America faced challenges that made us question the possibility of a better future. Each situation required a different kind of solution. But each time, America rebounded and moved ahead to new levels of prosperity, despite the overwhelming challenge.

Can we, will we do that again? It makes sense, based on our track record, to bet on America. I think that’s how they establish the odds in sporting events—based on a track record of historical performance.

NEXT: But Why Do I Have to Invest in the Stock Market?


But Why Do I Have to Invest in the Stock Market?
The stock market is not a casino, nor is it a “zero-sum game” where winners match losers. Instead, the stock market is a reflection of our economic progress and setbacks.

When you buy shares of stock in a company, you are investing alongside the other owners of the company, hoping for growth in profits. Those increased profits make the stock more attractive to other investors who, presumably, will buy stock at higher prices.

Thus, economic prosperity is measured in stock prices—although expectations sometimes overwhelm reality.

But just as all of nature is defined by cycles, the economy and the stock market have cycles, as well. If these cycles were perfectly regular, we could buy and sell with confidence —knowing we haven’t made a mistake. But lacking regularity—and impacted by the actions of government— the cycles become distorted, making it tough to time the markets over the short run.

Still, if you believe in the future, you need to invest for the future—despite the seemingly illogical short-term gyrations of the market. Those wild moves come from the emotions of investors who lose self-discipline in the face of fear, or because of their own greed.

Why Is This My Responsibility? Why Don’t They Have Pensions Like the Old Days?
Sorry about that, truly I am. But our economy doesn’t work like the “old days” when people started working for a company right out of high school or college, and stayed with the same job for a lifetime before retiring.

In past years, if you left a job before your company’s pension fund contributions had “vested” (meaning they were truly yours), then you lost out on those benefits when you quit or were fired. Now, you can take your “pension” with you—rolling over your 40l(k) plan into an IRA—or leaving it behind to remain invested with your previous employer.

The tradeoff for this flexibility is that each employee has his or her own account—so the way to get professional management is through mutual funds provided in the plan. That still leaves you with decisions to make about which funds to choose.

But, by Definition, the Professional Money Managers Are Better at This?
Sorry, again. Some professionals manage to rack up outstanding performance records over the years, but many are just as emotional as you are.

You don’t think the recent huge swings in the market were caused only by individual investors, do you? Human nature—fear and greed—impact all of us. You just notice your own mistakes more, because they cost you personally.

NEXT: Then Why Invest for the Long Run?


Then Why Invest for the Long Run?
Because over the long run, history says you’ll come out ahead.

According to the Ibbotson market historians (now a division of Morningstar), there has never been a 20-year period going back to 1926 when you would have lost money in a diversified portfolio of large company stocks with dividends reinvested.

They did the calculations for every 20-year period, going back to 1926—and without exception, the long-held portfolio came out ahead, even beating inflation!

But Wouldn’t it Be Better to Start in the Good Times, and Not in the Midst of All This Gloom?
I’ve quoted this T. Rowe Price study several times in my column, and in my books. It shows that investors who started out putting away a regular sum of money during the toughest bear markets were able to amass a much greater retirement fortune than those who started investing in the market when times were good.

That’s because in bear markets, your regular fixed investment amount buys more shares of a fund at lower prices. Then when the market eventually takes off —as it always has—you get literally more bang for the buck(s) you have invested.

What if You’re Wrong—And History Doesn’t Repeat? What if This Is the End of the American Economy and Capitalism and the Stock Market?
Then we’ll all have a lot more problems than our retirement fund balances. And that’s The Savage Truth!

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