Stocks are not a place to make easy money, by Jason Kelly
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The value averaging strategy you and I explored in my articles this week will be one of your only true friends in the stock market. Stocks are not a place to make easy money. They require discipline, a set of rules, something to guard against emotions, and the value averaging strategy provides all of that. Investors need to be very careful, and methodical in stocks.
This view of mine has changed over the years. When all stocks were going up in the 1990s, it was an easy conclusion to put every spare dollar into the market. Why not? The opportunity cost of doing anything else with cash was too high. Stocks went up, so buying them with all you had was the way to go.
It wasn't only the end of the dot-com bubble that reset expectations. It was the creeping feeling that the source of the bubble wasn't just speculative frenzy. Where was all the cash coming from? Whom was it benefiting? Those questions first appeared in the early 2000s, and doubts about former Federal Reserve Chairman Greenspan and the so-called Committee to Save the World surfaced. Was it possible that government policies of easy money, encouraged by bankers and big business, were somewhat to blame?
The questions went away as the housing bubble inflated and stocks resumed their upward journey, until that one burst and stocks crashed again. This time around, the questions about monetary policy are not going away and the walls of the castle have been torn down to reveal the structures connecting government, banks, and big business. It's plain as day that an enormous part of stock market performance depends on what that machinery spits out, and I have little confidence in it spitting out anything good. Sure, we'll have buoyant periods like we've seen in the past year, but when they're followed by busts that erase their gains, we're in Japan in the 1990s and investor morale will grind down until people decide that it just isn't worth it anymore. That's what Japanese people concluded. Nobody in Japan owns stocks.
I think the market is going to become a place for speculators more than investors, and that most people have no business speculating with their financial futures. A small part of a person's wealth should be in stocks for whatever growth nets out in long periods, but not so much that another institutional crack-up will threaten their freedom. Even that small portion of wealth devoted to stocks should be further divided so that two-thirds of it rides on proven strategies that can cope with the craziness, and only one-third depends on perfectly aligning the ducks of careful analysis, skillful timing, and good fortune. Those ducks are downright cantankerous, and hard to line up!
This week, I explored with you an excellent strategy to use in the stock market, one that will give you 3% quarterly growth through good times and bad. Learn more about it in the 2010 edition of my stock book, and use it to keep your wealth plans on track through the difficult economic landscape around us.
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