EagleTribune.com, North Andover, MA

September 29, 2013

A crisis in confidence

Financially Speaking
John Spoto

---- — Since the depths of the financial crisis, we have witnessed a stock market that has more than doubled and substantial improvements in other key measures of economic health.

Yet a recent survey conducted by The University of Chicago and Northwestern University business schools revealed that America’s confidence in the economy continues to slide. One of the main reasons cited by the study’s authors is a growing distrust of the country’s financial institutions and a deeply held view that our political leaders lack the will to fight the powerful Wall Street interests and institute the necessary protections for the average investor.

Supporting that view, a recent Gallup poll indicates that stock ownership among the average retail investor is down substantially from 10 ears ago. Although the American public has generally viewed the financial securities industry and the institutions that regulate them with suspicion, confidence in the markets has been further undermined by two “once in a lifetime” market declines in the last 13 years that inflicted extensive damage on the nest eggs of American workers and retirees.

Add to that the wave of improprieties, recklessness and outright corruption perpetrated by some of the nation’s largest banks, brokerage houses and hedge funds and it’s no surprise that many investors view the financial markets as an insider’s game that stacks the odds against them. How accurate is this perception? To answer this question we need to distinguish between trading and investing.

Trading in individual company securities, especially stocks is a fool’s errand. The evidence is overwhelming that the financial markets are not a level playing field for short-term traders. Big players like hedge funds and investment banks have access both legally and illegally (through company insiders) to market moving information before the investing public.

These “early peeks,” combined with the use of sophisticated technology and complex algorithms allow them to move in and out of individual positions in seconds, enabling these traders to earn profits (fractions of a cent on thousands of shares) on a remarkably consistent basis, an impossible feat for the average investor. In this realm of trading, it’s delusional to think the small investor can compete successfully with these institutional traders in identifying individual securities to buy and sell profitably.

Sensible investors understand that this activity is speculation, not investing, and steer clear of this loser’s game entirely.

Some, however, have taken this idea of a “rigged” system too far, convincing themselves that the large players make it impossible for the retail investor to get ahead and that the financial markets are to be avoided entirely. They have rejected the time-tested concept of a well-diversified investment plan and instead have fled to the “safety” of savings accounts, money market accounts and CDs, whose values are being destroyed daily by inflation.

Rational investors recognize that the way to build long-term wealth is through long-term investing, using a mix of stocks, bonds and cash that is consistent with their goals and ability to handle the ups and downs of the markets. They also understand that over the long-term markets grow and generate gains for investors because the underlying economies and individual companies are growing to serve the world demand for their products and services.

This demand has increased fivefold just since 1950 and shows no sign of slowing down as millions of people in less developed countries emerge from poverty and join the middle class.

The long-term growth trends of the U.S. and global economies provide smart investors with a level playing field on which they can successfully compete with the world’s most sophisticated investors.

The McKinsey Global Institute pegs the global stock and bond markets at $50 trillion and $175 trillion respectively. Common sense tells us that such enormous markets comprised of tens of thousands of fiercely competitive, unusually talented and experienced participants fighting over trillions of dollars in profits would make unlikely co-conspirators in an effort to crush the Main Street saver.

If such a conspiracy exists, we owe them a debt of gratitude. Even without including the reinvestment of dividends, the S&P 500 index has increased by a factor of 100 from 17 in 1950 to almost 1,700 today.

John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com.

This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.