If Bonds are the IOU’s or debt then Stocks are the equities, are percentages, shares in larger companies.
Let me start by telling you I have lost lots of money in stocks before I figured out why.
So I am going to explain my journey in stocks, so be a little patient it will all come together.
I started making good money rather young in the computer business and real estate, and everyone suggest I hire financial expert. I was educated above most, had an accountant and had a tax problem. About 40% of every penny I made went to the IRS.
So my accountant suggested I get an IRA, and at the time Dean Witter Reynolds was the largest company in the business of helping people like myself with their problems. So they suggested I open an IRA for the previous year, I was still in time, and one for this year. So there went my $4000, to be taken off my income. And with their projection those $2000 a year would grow to tremendous numbers by the year 2000. Sounded good. They also suggested that I invest even more money outside the tax deferred plan. So my Mom and I both invested an equal amount. Additionally she had a 401k with over $50k that she could roll into it. At the time they suggest a mutual fund of theirs that was paying over 14% a year.
Wow, with those numbers I thought we would never have money issues again. Well what reality happen about three years later was different. The Mutual fund was not making 14% but actually lost 5% of its value in those years. The stocks they were buying and selling for me seemed to be losing every time they bought them. The only thing that I was certain of was the falling value of our accounts.
We made lots of mistakes. One recommendation from our account, led us to opening multiple account with them. I now realize that my accountant was probably getting a referral fee. We never would have put our money in a mutual fund if we understood that past performance was never an indication of future performance. It never is, it is a trick.
Indeed as a mutual funds gets bigger it becomes harder to produce those results, and if a fund is doing well it takes more money and has to buy more stocks, that are overpriced, and soon the whole markets readjusts. But don’t worry for the money managers, they make their management fees in and out, up or down. Actually their 5% or 6% get paid whether you get paid or not. Of course you want to sell and then they tell you it is a loaded funded, which means more money from your principal.
So I then looked at my regular account, I had lost 50% of it value in a two year period. They were buying and selling my stocks about once a week, with no perceivable gain. Yes, I was a victim of churn and burn. So I decided to close my accounts, transfer my IRA somewhere else, but I still lost in commissions and load funds. All in all, it cost about 25% of our money, I could not sue, because we agreed to arbitration, and they certainly had more money than us to fight. Many years later, several years after my mother died of old aged I received about $300 from a class action suit. So much for my first experience in the markets.
Several years later, I was actually working for a big brokerage firm in their computer department. I was installing a computer on the floor, when all of a sudden I hear screaming, and the broker next to me tells me get under the desk. Apparently, a guy they churn and burned his life saving of over $250k, was wanting his money back and he had a gun. I am not sure what happen but after a while, I had a conversation with broker, he told me it happens all the time, it is a pretty common thing. Most scream and threaten and send lawyer letters, but seldom to do they get their money back.
I could talk about penny stocks, IPS, tips REIT, and etc..etc… They have their place but mostly your giving the bookie the money to invest in your stead. The result are predictable. LOSSES.
So am I saying that stock brokers are all crooked, well not all of them. The commission based ones have to be. They are incentivated and promoted based on how much money they make for the brokerage house, not you. They get hired from one firm to another, and are paid huge sums of money to come over and burn you again. Sure not all are this way, but you have to understand the motive for their actions.
Later I got into doing my in own investment in the stock market, I went to seminars, and took classes. I followed their advise and was basically trying to buy the best company or follow the best tip. I wasn’t losing money, but I wasn’t really making any and this was in an up market. I soon learn that it is hard to predict what is a good company, and harder to time its purchase or sale. But I did learn an important rule, always have a stop lost, and on Oct 1989 I was very thankful.. I only lost 10% of my money that day, but it was actually less than I had made over 12% over the previous years. Many got kill that day, discipline and consistency kept me alive. Oh, well more money to my million dollar education.
I decide to spend more time on career and business, and less on the stock market. I realized that I was spending about 10 hours week listening to Nightly business report, Wall Street Journal, etc… I was an investor and was not in a hurry, the problem was the stock market is a short term instrument no matter what anyone says, it goes up and down hourly, daily and companies come and go very quickly.
Let me tell you a fallacy about the DOW. Imaging a baseball team that every time someone strikeout, they are removed and replaced with the next newest player with a better record. The Dow 20 is a list of the Best New York Stock Exchange Companies, if a company doesn’t perform well it is taken off. So when I started trading, in the 1980 and it was around 1000, the companies are very different than they are today, So at 13,000 today, it does not mean the stock market went up 13 times in value. Most if not all the higher fliers of the 80’s are gone, replaced year by year with the new best hitters.
So does this mean the Dow Jones average is useless, well it is an indicator for the short term ups or down. The S&P index is much better indicator. So how about investing in SPDR “Spiders” which are like an index of the SP500. Well, they are somewhat diversified and they will grow with the economy. They are pretty liquid, the commissions are typically lower than buying a bunch of several stocks. I do believe they could be part of diversified portfolio. Just be careful who you buy them from. Anyone could say they are selling you SPDRs and not actually be doing it., ala Bernie Madoff.
There is no such thing as investing long term in the stock market, unless you have lots of money to diversify, and have the powers of the Oracle or inside information.