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.