This post will offend some people, but only because they know what I am writing is true. Investing in the stock market is not worth it unless you are rich. The finance and personal finance industry encourages you to invest in the stock market because it makes them richer. However ,if you think you are going to get rich by working an average corporate job and investing surplus money in the market… that’s not going to work.
The stock market and particularly passive investing generates very mediocre returns when the market goes up. When the market goes down people lose their savings which takes them years to earn back. Let’s take the example of someone working a corporate job that manages to save $10,000 per year after tax. If they have their money in the market and a recession hits and they lose $50,000 that means they lost 5 years of savings.
If they had built an online business instead they could have a self-sustaining business that they could invest their $10,000 yearly savings to scale their business. You cannot compare starting a business and investing in the stock market. If you are working class or middle class starting a business is what you have to do. If you are rich and have millions in the bank it can make sense to be lazy and throw your money in passive investment or to get private wealth management.
Why The Stock Market Is Mediocre At Best
- Opportunity cost (of the $)
- When you invest in the stock market your money is not being used efficiently. The opportunity cost (value of the best alternative) of investing your money in the market is too high. The best alternative to the stock market is building a business you control and collect all the profits from. A business, particularly online, can be bootstrapped but investing money in it will cause it to grow and scale much quicker.
- No say in operations
- When you invest in the stock market you are buying a share of a business, but you get no say in operations. Take it back to basics and ask yourself, is it smart to buy part of a business you will have no control over? Only if you feel you aren’t smart enough to build a business yourself.
- Inflation (eats away at the principal and the mediocre returns)
- You hear the number 8% average stock market returns frequently quotes, unfortunately this number is without inflation taken into account. After taking inflation into account the returns are probably between 2%-4%. If you want to invest your hard earned money for those measly returns, go ahead but you are not going to get rich from it and you are risking your savings when the market crashes.
- Recession can destroy savings
- This is the biggest reason you should be skeptical about investing your money in the stock market. When the stock market crashes (when, not if, because it always does) you need to understand you can lose 25%-50% of your money invested in the market. Those are not exaggerated numbers is it easy to lose half your life savings in recession if all your money is invested in the stock market.
- People invest based off of historic returns
- The often quotes 8% average returns for the stock market is the historic return for the S&P 500. If you invest based off this historic return and expect it to continue you are in for a bad time. You need to look forward and understand the sectoral shifts that happen in the market and in the world. The U.S. is no longer experience the growth it experienced in the 20th century. Investing based off of historic returns is like driving while looking through the rear view mirror, a bad idea.
- Indexing is a losing game
- Passively investing in a major stock index is a bad idea because with all the great companies in the index you also need to own the bad companies. Only 60 companies from the Fortune 500 in 1955 remain in 2017. If you buy a stock index you are inevitably buying bad stocks that won’t survive the “creative destruction” of capitalism.
- Stock pickers usually don’t understand the companies
- People that try to pick individual stocks usually do so based off of what the financial pundits say. If a broadcaster on CNBC or Bloomberg calls on a hot stock they buy it. Most people don’t do the proper due diligence of reading years of financial statements, and doing a thorough analysis of the investment opportunity.
Start A Business Instead
Smart people invest in themselves and started a business. This has happened for all of history and will happen for the rest of time. The people that deny this are failures and scared of taking the risks that make life truly worth living.
Think of any successful rich person and you will see that I am correct. Carnegie, Rockefeller, J.P. Morgan, Henry Ford, Bezos, Gates, Jobs, Zuckerberg all started real businesses and got massively wealthy. Imagine if they decided to take the safe route and just got a corporate middle management job that paid $200,000 per year. That’s good money and would make them “successful” in society’s eyes, but they always would have known deep down that they didn’t live up to their potential.
You will never know what you are capable of if you never take any chances. The problem most people have in life is they are scared to take risks, if you take risks your chances of being successful in business skyrocket.