In today's NY Times (here), the editorial writers observed that many investors are avoiding the stock market for good reason. Since 1995, there have been two major bubbles and two major crashes for the S&P500 (^GSPC). Unless the Dodd-Frank reform law (FinReg) kicks in (and the new Republican Congress has vowed to block the law's implementation), "...investors are right to be leery."CNBC's optimistic Jim Cramer (here) "...gets it--you don't trust the market" but goes on to argue that "...in spite of everything, when it comes to growing your wealth, the stock market isn't just your best option, frankly, it's the only game in town..." So what does the Random Stock Walker think?
First, the S&P500 index at least is not a random walk. Removing the booms and busts from the basic attractor (above) shows that (1) the index has grown over time, (2) the crashes have been over-reactions to bursting bubbles and (3) the market was even underperforming somewhat during the early 1990's.
All the positive statistical analysis and a positive forecast for the future (above) doesn't mean a lot if your retirement savings (like your 401K) are locked up in a market that has just crashed. This is the problem with the argument that pensions and Social Security should be eliminated in favor of 401K plans (for example, here). Although the stock market is the only game in town, it is not the right game for individual retirement investment. People on modest incomes simply can't save enough and the market has too much (obvious) volatility to provide stable income in retirement.
First, the S&P500 index at least is not a random walk. Removing the booms and busts from the basic attractor (above) shows that (1) the index has grown over time, (2) the crashes have been over-reactions to bursting bubbles and (3) the market was even underperforming somewhat during the early 1990's.
All the positive statistical analysis and a positive forecast for the future (above) doesn't mean a lot if your retirement savings (like your 401K) are locked up in a market that has just crashed. This is the problem with the argument that pensions and Social Security should be eliminated in favor of 401K plans (for example, here). Although the stock market is the only game in town, it is not the right game for individual retirement investment. People on modest incomes simply can't save enough and the market has too much (obvious) volatility to provide stable income in retirement. A different approach, neither the classical company pension nor the 401K plan, is needed. I'll talk about my proposals in future posts. On the other hand, if you're young, have any surplus income and can ride out 10-year bubbles, the stock market is a great place to invest. If you had bought Apple Stock at about $30 per share in 1988 (luckily, I did), it turned out to be a pretty good deal at over $300 per share, even in today's market (here). It's just a good thing I didn't have to count on it for retirement.
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