Are stocks a good investment?

We keep hearing breathless reports in the news of the stock market hitting record highs.

So people have been stampeding into the stock market hoping not to miss the latest boom (bubble) in stocks.

Everyone’s feeling good when reading their IRA and 401k statements that arrive in the mail each month.

But these record highs do not take into account the declining value of the dollar.

The dollar has lost 40% of its value since 2000.  Actually a lot more than 40 percent. That’s just going by official CPI numbers.

But the inflation rate is in reality much higher than the phony official average annual inflation rate of 2.7%

Anyone who goes to the grocery store knows that the real inflation rate has been more like 8% per year on average.

The cost of a gallon of regular gas for your car was $1.83 when George W. Bush left office.

The price of gasoline is not included in the official inflation rate (CPI).

But for the sake of my argument here, we’ll just use the official inflation rate of 2.7 percent per year.

The key point here  is that the reported increase in stock prices are in nominal dollars, not real value.

If you invested $1,000 in the Dow Jones Industrial Average in 2000, it would be worth $1,015 today – a whopping 1.5 % return on your investment over 14 years — if you use the official inflation rate of 2.7% per year (which we know is phony and grossly understates the real inflation rate).

If you invested $1,000 in an S&P 500 index fund 2000, this would be worth $890 today, an 11% decline.

If you invested $1,000 in the Nasdaq average at the peak of the dot com bubble in 2000, it would be worth $630 today – at Nasdaq’s supposed near-record high. This represent a 37% loss over 14 years.


And that doesn’t count management fees charged by mutual funds and brokers.

Assume a 1.5% management fee per year for the typical index mutual fund (if you’re lucky to find management fees that low). That knocks another 21% off your returns (or lack thereof) over this 14 year period.

And there are transaction fees even if you manage your own portfolio.

So if you are in the growth-oriented Nasdaq index, you’ve lost more than half your money over the 14 years.

So much for the advice we get to just “Buy the indexes and hold. Everything will be okay over time.”

Returns are even more bleak when you consider the volatility of the stock market. Volatility equals risk.

Who wants to risk everything (ala 1929) for the wonderful benefit of breaking even or losing money over a 14 year period?

Imagine if you get into the market now and the market loses 20% or 40% of its value, quickly – a likely scenario (because the recent stock market run-up is built on nothing but hope, not real numbers). How long would it take for the market to rise back to this level to get you back to even?

You might never break even in your lifetime.  There’s certainly no reason to think the economy will get better from here on forward.

People who put their money into the stock mark at its peak in 2000 are still waiting to break even 14 years later.

By the way, the stock market over time pretty well mirrors the overall economy.

The economy has been stagnant since 2000. So it’s not surprising the stock market has produced nothing since then.

The stock market boomed during the Reagan years through 2000 — when the economy was booming.

The economy is far from booming now. It’s hardly growing at all.

So don’t expect much from the stock market — unless you have a crystal ball and can time it perfectly, or just get lucky.

To me, stocks appear to be fools gold — not much better than casino gambling.

What I’ve outlined here is what would have happened to you if you had simply invested in the largest stock indexes — which most financial planners consider the safest way to invest in stocks.

But what if you had followed the recommendation of many Wall Street gurus who were recommending investing in Borders Books and At Home in 2000?

Those used to be the hot stocks.

Here are some other stocks that were super hot not long ago for companies that no longer exist: MCI-World Com, Paine Weber, Lehman Brothers, EF Hutton, Drexel-Burnham-Lambert, Enron,, Webvan, eToys, Commodore computers.

If you invested in these companies, your $1,000 investment would now be worth zero.

Do I have a better investment to recommend?

Not really.

Perhaps invest in yourself.

My rule of thumb: “I tend to make money in my own business and lose money in everyone else’s.”

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