Here’s a survey of the traps and lies of the stock market.
Lie the First: Money in the stock market is “savings”.
Reality: Money in the stock market is “speculation”. You buy a stock on the speculation that it will go up and you will sell it later at a profit and in the meantime, maybe get a regular dividend. It can also be considered casino gambling. It is not savings as we generally define the term, since it can be here today and gone five minutes later.
Lies the Second and Third: Everyone should be in the stock market. You can’t afford to NOT be in the stock market.
Reality: The stock market is only for people with money to gamble. People with debts and small savings should not be in the stock market. The former should pay the debts, including their mortgages first. The latter should wait until they have substantial savings before they decide to risk a small amount of their assets in the stock market.
The stock market game is rigged against the average small investor. With the way accounting rules and etc are these days, there are lots of ways that corporations can hide important information. Just ask some of the Lehman’s stockholders about that.
Lie the Fourth: Buy and hold is the smart strategy. Over time, the stock market always goes up.
Reality: That’s not the way the rich make their money in the stock market. They buy stocks when they are cheap and sell them when they are expensive. The “always goes up” comment is usually coupled with a comparison of two dates and the stock market index values on those dates. Compared to the history of economics, there is no way that we can say with total truth that the market over time will always go up. Where are the investments in the stock exchanges of the Roman Empire these days? And a rise in a stock market index may have nothing to do with the performance of individual stocks or mutual funds. Ask the stockholders of Enron about that. Or the stockholders of corporations that made horse-drawn carriages.
Lie the Fifth: Employer-sponsored retirement funds are the best way for society to organize retirement savings.
Reality: First, As noted above, stock market investments are not savings, they are speculations. Second, everyone with an employer-sponsored 401-k is totally at the mercy of the managers who select the stocks/funds that the retirement money may be invested in. These managers are totally invested in the present system — emotionally, financially, psychologically, and politically. Their decisions are colored by these prejudices, and thus they force the employees to participate in stock and bond market schemes that are likely not appropriate for the employee. The 401-k system is a structural welfare check for the stock market, not a prudent method of organizing retirement planning.
Everyone wants to get rich quick and easy, and like a lottery or a casino, the stock market promises easy and quick riches without pain or much effort. I think it is better to deal with that natural human inclination by something easy and cheap — like buying a two dollar Powerball ticket once every other month — instead of putting lots of money in the stock market.