What Would Make Me Invest in the Stock Market?

The world will change for the better when people decide they are sick and tired of being sick and tired of the way the world is, and decide to change themselves.

~ Sidney Madwed

I’ve stayed out of the stock market game for the most part for the past few years. Yet I follow and write about personal finance, investing, and economics every day. I still find it very interesting and I would love to participate again at some point.

Last week I wrote about risk tolerance in Stock Allocation: All or None? Many were supportive of the way I presented my choice even if they disagreed with the choice itself. But it was Larry MacDonald who asked the question that prompted me to write this post. He asked: “I was wondering, though, if you would ever consider more than 0% exposure to stocks and under what conditions?”

Why Have I Stayed Out of the Market?

Most of you are aware of my reasoning. (See 5 Investment Challenges for the Next Decade.) For those who aren’t, I’ll steal from a comment response I wrote to give a taste of some of the things that keep me away from stock market investing:

  1. Lack of transparency: Average investors are the last to know when real problems arise in the financial system. Witness the subprime crisis, and it’s latest iteration, which is apparently contained – until it’s not.
  2. U.S. debt & deficits are untenable and could cause massive problems in the currency, commodity, equity, and bond markets, especially in light of the fact that the greenback is the global reserve currency.
  3. Derivatives: These things make this a very different marketplace than the one that existed during the time period that comprises “historical stock market returns.”
  4. Computerized trading: In some ways, this has leveled the playing field for small investors. In others, it has further tipped the advantage in the direction of some of the pros. At the very least, it has increased complexity and volatility. At worst, it has lead to a marketplace that doesn’t often reflect the true value of the securities it represents.
  5. Ponzi Policies: I’m not interested in investing in a market that rises 200 points because the economy is so terrible that the central bank needs to create money out of thin air. I understand the mechanics of it, but I don’t think it will work and I’m pretty sure it will make things worse in the end.

What Would Bring Our Money Back to the Market?

I suppose you could just say that if the problems above were fixed, I would be happy to invest in the markets again. In some ways, most of those 5 points come down to the same issue I mention over and over: transparency. You cannot have an efficient free market system without transparency, for without it, there can be no trust.

The debt and deficit issue is not unique to the United States. Many countries in Europe, including the U.K., face similar problems. The fact that the U.S. is the largest economy and holds the global reserve currency, however, makes it a special case, and imparts on the U.S. government rights and responsibilities that other countries do not share.

Rather than just saying “fix it”, or “clean it up”, I thought about each of these 5 points and tried to imagine what would make me run out and buy stocks:

  1. Increased Transparency: If there’s a problem, I want to know about it so I can invest accordingly. I’m tired of trying to read between the lines of CEO, Federal Reserve, and Treasury official statements to figure out what they’re really saying. I don’t want to be told anything is contained only to find out it wasn’t. I don’t want to find out that there were major balance sheet holes in entire industries after I’ve lost 50% of my money and the rest has gone to bail out the businesses that lost it for me.
  2. Effective Fiscal Policy: The U.S. needs to signal that it’s ready with a concrete plan to tackle its fiscal mess. There are policies that don’t involve monetary alchemy that can be used to right the ship in less time than you might think. I’ll have more on that in Friday’s Food for Thought article. Stay tuned!
  3. Better Regulation: Notice that I didn’t say more regulation. The fact that derivatives have been allowed to grow into the market minefield that they are today speaks to the double-edged sword of innovation. Yes, we should try out new products that might improve our financial system. But we can’t give carte blanche reign to financial engineers who know more than the regulators about how these things work. Products like these need to be introduced gradually and monitored closely. Derivatives belong on a transparent exchange.
  4. Reduced Size and Complexity: Many aspects of the market system have become so complicated that the Dr. Frankenstein types who designed them don’t even know exactly how they’ll behave. The financial sector in general is too big and it needs to shrink. Banks need to go back to the basics so that they can contribute to the real economy. No more hiring armies of mathematicians to figure out how to spin gold out of straw with financial products that line their own pockets and fleece the real economy.
  5. Get Real: Our current financial system is a Ponzi scheme that’s nearing its end game. We cannot continue extend and pretend policies and expect that all will be well for our children and grandchildren. We need to get real about pension liabilities and how much government and corporate pensions will really be able to pay out in light of market returns and demographic challenges. If we want a free market economy, we can’t keep kicking the can down the road. We can’t label China a currency manipulator while we pursue policies that muck up the economic gears to a much greater degree than the level of the yuan.

In short, we need to grow up and stop stealing from our children’s future. We’re supposed to leave them a world that’s in better condition than we found it. We’re failing. It’s time to stop and change directions now. I would be happy to invest in a market based on real business fundamentals rather than financial alchemy. I don’t see that anywhere right now.

I hope I’ve answered the question. If you have any others, feel free to comment here.

Written by Kim Petch

18 Responses to What Would Make Me Invest in the Stock Market?

  1. Our current financial system is a Ponzi scheme that’s nearing its end game.

    Those words sum it up for me. The stock market today is a Ponzi scheme. I don’t put my retirement money in Ponzi schemes. End of sentence, end of paragraph, end of chapter, end of book, end of story. I only invest my retirement money in things that are real.

    There was recently an article at a blog that regularly promotes Buy-and-Hold that argued that the stock market is not a Ponzi scheme. The argument was that there are real companies earning real earnings. That’s a word game. It’s true that there are real companies earning real earnings. But that doesn’t justify overvaluation. To the extent that the market is overvalued, it is a Ponzi scheme — those who buy shares in it are buying shares in something that it at least partly not real — and the market is overvalued by no small amount today.

    I need to see honesty. In market prices. In investors. In investment analyses. In blog posts (And I don’t mean by that last comment to take a hit only at the person who wrote the blog entry — I believe that all members of a community who tolerate such word games are guilty of at least some small amount of dishonesty, and that’s all of us).

    We need honest markets. When we have that, all the other good stuff follows. Once we all start working together to rebuild honest (reasonably priced) markets, we all are going to feel better about ourselves and about our financial futures. Humans were not meant to participate in as much dishonesty as we have been required to participate in to invest in stocks over the past 15 years or so.


  2. When I read your reasons, I think the issue is trust or faith. What I think you need to understand is these problems have always existed. Technology and internet has just brought this stuff out of the woodworks. None of the issues you present are new and they will always be there. Sometimes they reappear in a different costume (that’s my halloween analogy for the week).

    For the entire history of the stock market there are always GOOD reasons why you should not be in the market. Despite the bad news, there are also REASONS why it’s good and important to be in the market. Although I am conservative and can appreciate some of your rational, I think 0% is a little extreme. Try to find balance . . . afterall isn’t that what you are all about BalanceJunkie?

    You got to have some faith in the system that good will prevail in the end!

    • I can certainly understand that lots of people will want to invest some of their money in stocks. I think that’s fine. It’s just not for me, at least not now.

      I’m also aware of market history and the fact that there has always been some form of corruption in the background, and probably always will be. I happen to think that those issues are elevated right now, even on a historical basis.

      I have faith in people, institutions, and concepts that have earned it. I don’t have faith in the markets for now.

      I’ve heard the balance argument before as well, but I think I’ll address that in a post next week. Stay tuned! (Gee, if you guys keep coming up with great questions, I’ll never run short of ideas to write about!)

      Thanks for asking the tough questions Jim! 🙂

  3. I think every person plays the market in their own way. They have different expectations and analyze the markets based on it.
    There are good companies and bad companies. Under valued companies and over valued companies but this come with the territory. Of course blatant corruption, manipulation etc need to cleaned out but overall the market heals itself.
    During turbulent times, it does look a lot more bleak than other times but if we keep our sanity and play the market right, it would do most of us “some” good if not a lot.

    • I think investing in the market can be a good thing if you do your homework. I just don’t think it’s a must.

      Thanks for stopping by! 🙂

  4. I don’t know if you’ve discussed this before but here’s a question:
    Since you have 0% exposure to the market, where is your money invested now? in GICs?

    If yes, how are you planning for retirement knowing that inflation might be beating your return for an extended period of time?

    • I’ve answered both before. We do have most of our money in GICs. Some is in high interest savings accounts.

      I always find it interesting that stock investors think cash will get killed by inflation, but money in stocks won’t. Inflation hurts the value of all money, no matter where it’s invested. I covered this a little more fully in the original Stock Allocation: All or None? post. If inflation becomes a problem, interest rates will rise as well.

  5. I think you are looking for a level of stability–i cant blame you. Right now we are on a seesaw and have no way of knowing what will happen next.

    I feel for yeah brother!

  6. I guess the main issue is that by avoiding the stock market, you’re avoiding the main avenue for wealth creation and capital growth. I do agree though that there are a lot of things to be watched out for (manipulation, HFT programs).

    Although those stocks represent some cash, they also represent factories, enterprises, and employees. I do find Rob Bennett’s thesis interesting, though, because even though they represent productive assets, you don’t want to overpay for those assets.

    • There are so many variables to weigh. I guess I was just trying to point out that we will all give each of them (value, macro issues, company fundamentals, market psychology, market structure, etc.) different weightings.

      I’m willing to risk a little inflation until I see a lot of it coming. Negative yields on Treasuries don’t portend inflation – yet. Others would rather try to get some extra returns by investing in good companies. I think both approaches are fine.

      By avoiding the markets, I am avoiding one avenue for wealth creation. But I’m also avoiding an avenue for wealth destruction. 😉

  7. Such a complicated topic. First I have to agree with your sentiment at a base level. There are obvious and inherent “house advantages” that big institutions and big money have over me that suggest that I’m the “dumb money” in this game. I don’t like being the dumb money.

    The thing that keeps some of my money in the markets is a combination of your item #2 and the point that your first commenter dismisses. Currency issues make inflation a real concern and many of the obvious hedges to inflation are already overvalued due to other people’s similar fears. If I just take my toys and go home inflation could very well eat me alive.

    While I agree with pretty much everything you said, and largely agree with the underlying sentiment in Rob’s point, I think there’s merit to the point he’s contradicting as well. For all the lack of transparency, shell games and other nonsense going on in the stock markets, some (and they ARE a minority, in my opinion) of the companies out there ARE real companies with real earnings and assets.

    The money I make is from my own businesses and I wish I could invest in more small businesses, but if you want to talk about a lack of transparency, try doing your due diligence on a company that ISN’T publicly traded. Throw in the fact that very few businesses are going to be hands-off I find myself looking for companies will reflect inflation and that I don’t have to run.

    Is this a tactic for everyone? Probably not, but in many ways in the modern financial world, you’re trying to find which asset class wins the “least ugly” test and you and I both know that leaving your assets in cash can be just as risky as investing in something else. That’s part of the reason we’ve started our site is to help people find the minimal set of knowledge that can help them avoid all the financial bugbears lurking out there.

    Government policy as well as many other factors have turned the stock market into something of a Ponzi scheme, but that doesn’t mean there aren’t assets among the chaff that are worth buying. At least that’s what I tell myself as I invest in something that has ALL of the downsides you mention in your post. 🙂

    • Thanks for your thoughtful reply Rachel. You made a lot of great points. I really like the idea of investing in great businesses too. In fact, I’m constantly tweaking my “get back into the market” shopping list.

      One day I hope to execute on it. Until then, I’m OK sitting on the sidelines with my GICs and watching the game from a safe distance.

      Readers: If you want to check out a great new site, stop by MomVesting!

  8. Hi 2 Cents,
    I have not yet tried to invest in the stock market, but I am planning to do it as soon as possible. However, after reading your post, I had second thoughts. I thought that online trading is best. But it seems that I would rather put my money into my own business than putting it to someone’s business.

    • Putting your money in your own business is always a good idea, but putting all of it there may not be such a great plan. If you want to try your hand at investing, go ahead and set up an online account. Just take it slowly and keep your position size very small until you gain more experience. Never put more money at risk than you can afford to lose for keeps.

      I realize you didn’t actually ask for my opinion, but there you have it. I hope it helps. 😉

  9. Very interesting post. In the end, you need to do what’s best for you.

    I think, as many folks have already mentioned, you have a big trust issue here and I can certainly see where you’re coming from. Things haven’t been great in recent years but then again, the big machine has never been perfect. Far from it. For that reason, even if you’re not ready for stocks, you’d be ready for bond ETFs. I think if you have at least $25 K or more invested in GICs, I would strongly encourage you to at least read up on bond ETF products. With these, you buying lots of safety in the bond market. You’re not buying individual stocks. I would encourage you to read up on XSB or XBB, if you feel a little frisky about the latter. That is, as frisky as bonds can be.

    It costs you nothing to read up and learn about these products and I’m convinced many fellow bloggers could help you understand them very well. In the end, no commitment necesary 🙂

    My Own Advisor

    • I’m very well aware of what bond ETFs are and how they work. That’s why I’m not invested in them. I know about XSB, XBB, XCB and XRB. If rates rise, they will get creamed (with the possible exception of XRB.) If they stay where they are, the return won’t be any better than my GICs. Bond funds are not a good place to be right now.

      Bill Gross of Pimco said today that the great 30 year bull run in bonds is coming to an end. I happen to agree with him. I don’t know how long it will take for the top to truly be in place, but it’s close enough that I don’t want to be anywhere near a bond fund.

      Thanks anyway! 😉

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