My economics professor strode into the amphitheater the first day and in bold letters wrote “TINSTAAFL” on the board. He then turned to face the class and, waving the chalk in his hand as if he were holding a brand new dollar bill boldly stated, “Ain’t that sexy!”, and then marched out the door.
“TINSTAAFL” we all wondered. And then we got it…”There Is No Such Thing As A Free Lunch.”
Similarly, I have been known to say, “TINSTAARFI”. “There Is No Such Thing As A Risk Free Investment.”
As I write this the stock market has plunged 350 points, after a see saw ride yesterday. Is the economy roaring? Yes. Is unemployment at a historical low? Yes. Are wages going up? Yes. Is the current administration slowly but surely getting the government off our backs? Yes. Are people better off today than they were 3 years ago? Yes.
Then why is the stock market going down?
The flip answer is, “Because there are more sellers than buyers.” The actual answer is not much more profound than that, but has at least three parts:
1) Because the “arbs” as they’re called (short for arbitrageurs or short-term, professional traders) are watching each other and have all joined a herd that are headed for the exit;
2) Because the computer algorithms that work in hundredths’ of a second have calculated that the market is going down; and,
3) Most importantly, because the headlines today are full of fear and dread: the China trade talks are stalled; our favorite Venezuelan insurgent’s attempt to oust the country’s dictator failed last week; Israel and Hamas are trading rockets; the Iranians are threatening to blockade (hah!) the Strait of Hormuz; and of course, the Arctic ice is melting.
In short, there are more sellers than buyers.
Depending on your investing goals, where you are in your life cycle, and a slew of other factors, a plummet in the stock market is either a shoulder shrug or a catastrophe. If you’re thirty something and you buy on the dips, this is a good thing. If you were about to cash out of a bunch of stock because you needed it for your daughter’s wedding or to make the final payment on that boat you’re having built, it’s a bad thing.
There are enough investment “experts” (see my article on this subject here) to provide reading material and television fodder that I don’t want to upset the apple cart. But I don’t know you, I’m not your advisor, and I can only suggest that if you are in danger of needing anything from Maalox to a defibrillator due to stock market gyrations, I have the following suggestion:
Put all your money in boring, low-yielding bank certificates of deposit and treasury bills, notes and bonds.
Why?
Because if you create the right mix of these instruments, you will earn an entirely predictable return on your money and be completely immune from market gyrations such as today’s. (P.S. the market is now down over 500 points).
“WOAH!”, the talking heads and experts will scream! You will lose money if you do this because while you may avoid market risk, you will still face inflation risk. In other words, your purchasing power will erode.
My answer to this fallacy is: the fees and commissions you pay for the advice you’re getting from the “experts” is likely more than enough to offset that risk, especially when inflation is low to moderate as it has been for some years and is likely to be for some years to come. Follow my suggestion and you’ll be able to avoid middle men entirely, saving you money and wear and tear on your body and psyche from sleepless nights.
By the way. I realize this is a touchy subject…one that could prompt hours and hours of hand-wringing and vituperations from my former Wall Street colleagues, but I offer up this suggestion because I managed just such a portfolio for my own father in his retirement, never paying a commission, never paying a percentage of “assets under management”, and month after month, quarter after quarter and year after year he pulled out of his “nest egg” more than enough to live on comfortably. In years when interest rates were relatively higher, he didn’t spend the extra, but we reinvested it and his nest egg grew. When rates were down, he still took out what he needed, and he slept well and was a happy camper until the day he died.
The market as I write this is now down 600 points. How will you sleep tonight?
