Clouds Ahead: Stocks are a Useful Pain

By Gary Silverman, CFP®

We are in a series about truths that are not fun but need to be known. And, in many cases, acted upon. Or as I look at it, I am smacking you alongside the head to get your attention. Today we tackle stocks.

As regular readers know, I both encourage and discourage folks investing in the stock market. Here are some hard truths:

• Most people do not have enough room in their budget to save enough to last through their preferred style of retirement without having at least some investments in stocks. This is probably you. Either stop fearing stocks, live less now to increase savings, or reduce your retirement expectations.
• Stocks will disappoint you, often for multiple years in a row. From the height of a market cycle (when most of you really like buying stocks), it can take a decade or longer to go through a bear market and recover enough to have made your investments worthwhile. Patience is mandatory with stock investing; you must avoid the temptation to buy when the market soars and the temptation to sell when it is plummeting.
• If you’ve figured out how to invest in stocks and make a profit every year, you are wrong. If you’ve figured out how to get out of the market before it goes down and back in before it goes up, you are wrong. If you think you are the exception to this, you are wrong. If you know I am wrong because you’ve done this for the last decade, you’ve just been lucky (statistically speaking, this type of luck is probable).
• Most people should not invest in individual stocks but rather through a diversified fund. I really don’t care (though I have opinions) whether the fund is active or passive, an exchange traded fund (ETF) or a mutual fund, or whatever they come up with next. First, the fund will likely do better than you would have; it will likely be less emotional about the market than you; it will be more diversified than you; and letting someone else do it means you have more time for your kids, your friends, your bowling league, or wherever you prefer to spend your time.
• Since stocks can disappoint for quite a while, they are lousy short-term investments. By themselves, you should have a 10–15-year horizon. If you are smart and you know that stocks should only be a part of your portfolio (how much depends on your circumstances), you can drop that to as little as 5 years.

Ignore none of the above. If you do not understand it, start learning.

See you again next week where we stay with the money theme for one more column. This time we will look at spending—a popular hobby for most.

May God protect the innocents in Ukraine.