When I read this and anlyzed some of the major market tops over the last 100 years, I was surprised by the accuracy of this statement. (One major exception was the 2000 Tech Bubble, which was quite different from other market dynamics.)
S&P 500 Jan 2011 – 2016
The theory behind this is that the “smart money” figures out that a market is topping long before the average Joe. I’m not sure if I agree with the theory, but it does seem to me that the “stupid money” gets out way too late, after the market has dropped significantly.
We have been talking about how most people are not confident about investing and rely on the “advice” of financial planners. Nearly all of these people end up buying mutual funds and bond funds. And, I noticed the huge numbers of people who invest in index funds. I started thinking, why are these investments so popular when they are so bad?
First, let me point out why I think these are terrible investments. These advisors are not advisors at all. They are salespeople. And they get paid about 5% to sell you a mutual fund or a bond fund. They get paid even when you lose money.
Secondly, nearly all would-be investors cannot handle watching their portfolio go down 50% or more. When they reach their pain threshold, they sell. The “advisors” always say, “It’s gonna come back. Just hold on.” It’s easy for them to say that because it’s not their money.
Dow Jones Industrial Average 1929 - 1932
Finally, the stock market is going down right now. And, I believe it is going to continue going down. Millions of retirees are going to be pulling their money out of the market. Besides that, there is a chance that we are going to have another 1929 style stock market crash. At that time, the market went down 90%.
Why do we continue to make the same financial mistakes?
The Chinese Yuan continues to strengthen against the dollar. Since China let its currency float, it has appreciated 2%. What global forces are going to continue its appreciation? Here’s my post from back in July just after the Chinese government removed its currency peg.
The Yuan Continues to Appreciate against the Dollar
As the Chinese economy grows, the Yuan will continue to get stronger. And, as the U.S. government continues to create more money and more debt, the dollar will get weaker. It’s not difficult to figure out which way the market is going.
Since this new investment system does not yet have much diversity, I was looking for different investments. One of the most interesting that I found was the Euro Pacific International Value Fund. A mutual fund? Yes, I am a bit surprised myself.
After writing many posts about how bad mutual funds are, why am I considering this one? Because it makes sense. It follow’s Peter Schiff’s investment approach. I read a few of his books and I agree with his investment philosophy. You can read about it here.
As Social Security begins to collapse and the millions of baby boomers begin to retire, many will wonder where all the money went. It was only last year when would-be retirees lamented,
“My portfolio is down 50%, so I can’t retire. I don’t even open up those statements anymore”
Dow 2006 - 2010
Did you see these people on the news? I remember them clearly. But now that the market has recovered, they are long forgotten. And the lesson was not learned. Most people have their entire retirement account invested in mutual funds. As soon as the market goes down again they will be in the same unenviable position.
After watching those financial shows and listening to a few financial “advisors”, I have come to the conclusion that they don’t really know what they are talking about. Yes, it’s true that the words are pieced together to creates some meaning, but there is no value.
Here’s a clip from Stock Watch.
Most of the time, they say something like, “If this happens, then that will happen.” And I think, “OK, that’s nice. But it doesn’t really help me.”
I found this great story on Yahoo about an octopus named Paul, who has the ability to know who is going to win each of the world cup games. It sounds incredible, but it’s true. His picks have been televised on live TV. Plus, even though he is German, he correctly chose Spain over Germany. So that means he is not prejudiced.
Is this octopus really clairvoyant, or could there be another explanation?
A few weeks ago China let its currency float against the dollar. The result has been that the Yuan is getting stronger and the dollar weaker. I don’t think anyone is surprised…
Just when the dollar was in its worst shape, Greece defaulted on its debt. This had a powerful strengthening effect on the dollar. Now some people think the EU will disband, and the Euro will die a quick death. Personally, I think it is fairly likely. As soon as more global financial turbulence causes other EU countries to default (like Spain, Portugal and Italy), the strong will bail.
After reading this great post at Early Retirement Extreme, I was reminded about the low quality of financial advice that most people accept. Not only do they accept it, but they actually pay for it!
Mutual fund companies make billions of dollars from unsophisticated and naive investors who buy mutual funds and hold them. What most of these would-be investors don’t realize is that each year the mutual fund managers take some of the money for themselves. It seems like a small amount, only about one percent.