I’ve mentioned a few times that I dislike stocks, bonds, and mutual funds, aka the stock market or publicly traded market. It occurred to me recently that I haven’t told you why. Before I do so, however, I want you to know this is a personal preference, not a right or wrong answer. I have many friends, colleagues, and associates who invest in the stock market, and lots of people have made lots of money in the stock market. With that disclaimer out of the way, let’s begin.
There are a number of reasons why I don’t invest in the stock market, but I think it mainly stems from liquidity. Merriam-Webster defines liquidity as “consisting of or capable of ready conversion into cash.” In other words, the ease with which an asset can be bought or sold. Stocks, bonds, and mutual funds are liquid; real estate , for example, is not.
Liquidity is often considered a positive trait, but with liquidity comes volatility. Consulting Merriam-Webster again, volatility is “a tendency to change quickly and unpredictably.” In other words, the value of your portfolio of stocks, bonds, and mutual funds can rise and fall quickly and unpredictably. In my mind, this is not a positive characteristic. We’ve all seen this happen – one day your portfolio is worth $100,000; the next day it is worth $90,000 and on and on the cycle goes. So what happened on this day when your portfolio declined by 10%. Here are some examples:
– A banker made statements about the direction of interest rates.
– A third-world dictator launched another ICBM test.
– A natural disaster occurred in another part of the world.
– A politician tweeted something stupid or offensive.
Notice that none of the above reasons likely had any direct impact on the business fundamentals of the assets comprising your portfolio; the one that just took a 10% hit! What happened was the liquidity of the stock market allowed thousands of people and institutions to immediately buy or sell millions of shares of stocks, bonds, and mutual funds, thus affecting the supply and demand and ultimately the prices of those shares. And what was all this buying and selling based on? Emotion. It was based on people’s thoughts and feelings about what might happen in the future. The last time I checked, not too many people have an accurate crystal ball.
Most of the assets I invest in are illiquid, a characteristic that is usually considered negative. But the illiquidity and quality of my assets have provided consistent double-digit returns for the better part of a decade despite the gyrations of the stock market.
Hi Chris.
My experience in speaking with others who are invested in the market (401K, Roth, direct online trading acct, etc), is a lack of understanding what their end game is. Or, which stocks, bonds, mutual funds, CD’s, etc matches their end game.
In order to attain the 4% draw down so popularity touted, some don’t understand how that is achieved. Is it straight stock gains, dividends, or interest bearing yields to achieve the target draw down?
Worse yet they don’t understand what the stock their “investor” chose for them and how to use those vehicles. Finally, failing to leave enough cash available to weather a market down turn, is as well a forgotten component of their plan.
Hey Mark,
I’m not an expert in the more traditional type of retirement planning, but I certainly agree with your comment; many people have a serious lack of understanding when it comes to investing and retirement planning. And that’s ok on one hand as we all can’t be experts in everything, which is why we hire outside help – people who are experts in a particular field. My experience with investment advisors has been that most of them subscribe to the same philosophy, which is to build a mountain of assets consisting of stocks, bonds, and mutual funds and then sell them off at a 3% – 4%/year rate to fund your lifestyle. I have some concerns with this philosophy, and since I don’t own any stocks, bonds, and mutual funds, they don’t know what to do with me. The great news is, you and Joodie seem to have done it right! You left the workforce at a relatively young age and from what I can see are having the time of your lives. It’s fun and inspiring to watch, very happy for you. We’ll meet up on the trail soon! Chris