A few weeks ago, I was chatting with a friend, and the main topic of conversation was the stock market. At the time, the coronavirus pandemic was at its peak, most stocks were plunging, and that’s how the conversation started.
My argument was that unless you’re already pretty well off, you shouldn’t expect to make any kind of descent money on the stock market.
His argument was that it is possible. He brought up the classic compounding strategy: monthly deposits, no touching the money until retirement, and a healthy 5 to 10% yearly return.
In this article, I want to explain why I think the stock market is not the best way to make money. This is NOT in any way trading advice, and I am NOT in any way a stock market “expert”. Whatever you do, never invest more money than what you can afford. Once you put the money in the market, consider it gone without expecting anything in return.
With that being said, let’s get to it.
Nobody knows where the market is going
“Nobody knows if the stock market is going up, down, or round in f*cking circles”
— Matthew McConaughey in the movie ‘The Wolf of Wall Street’
You could pick 10 stocks to invest in right now at random, and make more money in a year than your next expert trader on the NASDAQ floor. Nobody knows where the market is going. Nobody.
Sure, there are trends, patterns, statistics, numbers… But all those are assumptions. The truth is, nobody knows what is happening. You can identify a pattern, invest your money based on that, and lose it all because the pattern didn’t go as planned this one time.
Stocks tend to go up when companies make money. For the past 10 years, companies have been making a LOT of money so it’s been very easy to make a good return on the stock market. But now everything is going to hell, most if not all of the “experts” have been bleeding money. We’re talking billions of dollars wiped out in value.
On the black swan theory
“The black swan theory is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalised after the fact with the benefit of hindsight.” — Wikipedia
Before coronavirus, I would always tell my friend to not invest in the stock market because you never know might happen. During the pandemic, it was very easy for me to say “I told you so” All he had to say was “this is a one in a lifetime thing, you could NOT have anticipated it. Don’t act like you were right all along”
I was right all along in saying to be careful and that you never know what might happen. I had no idea coronavirus was going to happen, but that’s exactly why I don’t invest. Because I have no idea.
When coronavirus is over and the stock market stabilises, people will rationalise the effects of the virus on the stock market. “A crash had to happen anyway, it had been going up for 10 years straight”. If we knew that a crash had to happen, try to find one investor who saw this crisis coming. Nobody did.
The black swan theory always holds true, and you never know when the black swan is coming. A gold rush of 10 years had to end, sure, but nobody knew the crash was going to be this big.
People have no idea what they’re doing
“As long as you hold, you don’t lose”
— Everyone, about the stock market
Except nobody holds. Part of the reason the stock market went bust is because everybody did the exact opposite of holding: they sold like crazy. A guy at work told me “I just took a big loss and re-invested everything in the stock market sale of the decade” But it’s going to take him a very long time to recoup what he lost. At the end of the day, was it better to hold and wait for his existing portfolio to go back up? Or to take the loss, buy stocks on sale, and wait for them to go up again? Nobody knows. What is for sure is that most people have no idea what they’re doing on the stock market.
A lot of people who invest do it in an erratic, unstructured, emotional manner. They buy and sell as the weather goes, and they don’t have any kind of strategy whatsoever. Learning about stock market forecasting WILL help you make better decisions, but it will NOT remove the uncertainty factor. Plus, you will always have feelings, you will always be prone to panic.
The investors who made it big got lucky
99% of the investors who became billionaires on the stock market relied on luck to build their fortune. In life, never rely on luck, but always acknowledge it. The stock market is the opposite of that philosophy.
Not only did they get lucky, they toyed with other people’s money. Ray Dalio, Warren Buffet, Bill Ackman, Ken Griffin… All these guys started off by either investing other people’s money in the stock market, or borrowing a huge ton of money from their network. It’s much easier to take losses this way.
Warren Buffet’s extraordinary wealth is based on a very limited number of investments (around 10) that he made in the second half of the 1900s and never touched again. He does get credit for holding and not selling for literally decades. But at the end of the day, luck played a huge part in his success. He invested during one of the best times in the history of our modern economy, and picked the best stocks. Yet at the time of this writing, his fund has lost over $50 billion dollars due to the current stock market mayhem. Because he didn’t get lucky this time.
On the compound interest strategy
“You can grow the money you save by investing it to earn a return. You can make your money grow faster if you also invest the money you earn (your return) along with the money you started out with. This is called compounding.” — getsmarteraboutmoney.ca
Unless you have a lot of money, the good old compound interest strategy will not work for you. Let’s say you invest $10,000 upfront, with a yearly contribution to your fund of $10,000, for 30 years. You already need to be pretty well-off to do that, most people can’t just invest 833 bucks per month. In fact, more than half of Americans couldn’t handle a $1000 emergency with savings. Let’s assume you make an average return of 5% per year. How much money do you think you’ll have when you retire in 30 years?
Here is the breakdown, year per year:
That’s assuming you have a good income and can shell out 833 bucks per month for 30 years of your life. You still need to pay for all your monthly expenses, and at the end of it all, you’re not even a millionaire. The folks that were about to retire and had their retirement account locked up in the market post-coronavirus are having it bad right now. They just lost 20% of their portfolio, regardless of how good it had been doing.
Now let’s say you have a bit more money to start with. Maybe you inherited a money, and you want to put it to good use. You invest $100,000 upfront, make an annual addition to the fund of $20,000 ($1,666 per month), and you perform pretty well, at 8% per year on average (3% more than our previous example). When you retire in 30 years, you will have:
Here is the breakdown again, year per year:
Not too shabby. You can definitely retire with that, but we’re not talking yachts and Piña Colada on the beach. Not that this is what life is about, but anyways. Before you get to enjoy your money, you need to remember the first guy that’s going to come knock on your door.
Don’t forget the taxman
Even if you do well, you don’t get to go home with whatever number is sitting in your portfolio after 30 years. If you decide to cash out, you’ll be taxed on the profits you made on the stock market. The amount you’ll have to hand over to the government depends on where you live. Here is a map of the capital tax gains per country, in Europe, in 2019:
Here is the data for the USA:
Going back to our $740,827 in profit for a more average Joe (still pretty well off), that’s more like $518,578 after a conservative 30% tax rate. Barely half a million after 30 years of investing. Your financial advisor might be able to bring down your taxes. The first few thousands are usually not taxed. Plus, you can avoid some taxes with various financial schemes (more or less legal). But your financial advisor is going to take a commission.
So what do you do now? Well, you can choose to keep the money in the portfolio, and only live off the interest from now on. That way you avoid a big chunk of taxes. If the economy stays healthy and you keep yielding 5% a year (highly unlikely), you’re making $37,041 a year. Not bad, but that’s taxable income too. It’s safe to say you can make $2,000 per month. Still not bad, but again no millions.
What about saving?
Now, how much would you have if you had only saved for 30 years instead of investing? With our $740,827 example, you’re putting in $10,000 upfront, and investing $10,000 every year. Let’s say you just wire that to a savings account instead of the stock market. With no interest rate, that’s $310,000 after 30 years. That’s liquidity right there. This is money you have in your savings account, no taxes, enjoyable right now.
You didn’t risk any of your money. You didn’t risk losing 20% in one year because of some pandemic. You didn’t have to go through bad years where actually, your advisor’s strategy didn’t go as planned and your average return for the past 5 years is not 5% but 3%, but his commission is still 10% and thank you.
With $310,000 you can live off $2,000 a month for nearly 13 years. Again, no risk involved, this is your money sitting in your bank account.
Nobody knows where the market is going. Overall, the market trend for the past 100 years has been going upwards, that’s undeniable. The only way to maximise your chances of making any sort of decent money on the stock market is by investing it, considering it gone, and holding it for years at a time. Except most people don’t hold. They make decisions with no experience, based on their emotions and the crowd feelings. That’s also why robots are better equipped to trade, but that’s an article for another day.
You can make money on the stock market. But it will most likely not be millions, it won’t be a sustainable income, it won’t be before many years, and it will depend a lot on how lucky you get. Also remember that the more you make, the more your bank will let you get in debt by borrowing against your shares. Another article for another day.
There are so many factors to the stock market fluctuations. So many parameters, patterns, variables, formations, feelings, emotions, people, digits, curves, graphs… But there’s one thing that the stock market doesn’t have:
Thanks a lot for reading! Again, this article is in no way intended to be trading advice, and I am not a trading expert. I am not responsible for how you invest your money. Feel free to let me know what your thoughts are on the stock market, using the comments section below!