For those who haven’t figured it out yet, our financial markets are laughable. The last collapse, that began in 2007, scared many away. But, it’s actually the recent rise over the last 4-6 months which has me more concerned. You see, there’s no rhyme or reason as to why the Dow Jones Index and others continue to climb steadily.
Sure, jobs are coming back slowly. And, there seems to be a more optimistic view that our economy will become a tad healthier in 2011. But, none of this was apparent in the third and fourth quarters of 2010 when the Dow Jones Average jumped from a miserly low of 9,500 points to over 11.500 by the end of last year. And, every day we still see plenty of negative indicators largest public companies and state and local governments that all isn’t well from a growth standpoint.
My feeling is that for the average Joe, investing in our financial markets is no different than playing craps or blackjack in a casino. The only real distinction (and positive) with playing blackjack or craps at a casino is that a player can actually understand what his/her odds are to win (even though those chances might be ever so small). For the average investor, the belief that a level playing field existed used to provide a lot of comfort. Most felt that they would be taken care of in the long run if they invested in fairly safe and conservative bets over their working lives. We all know now that this belief is nothing more than a mirage. The reality is that huge institutional forces can (and will) coerce excess and greed into almost any investment marketplace. Because of this, no one individual investor can ever truly feel confident that his/her portfolio will be safe, or far worse, when the markets might simply crash again.
Yet, it’s pretty ironic that most of continue to operate in a mindless sheep-like fashion. We herd once again in packs to these same stocks, bonds, mutual funds and other investments. We all seem to have incredibly short memories because everyone is feeling pretty darn good now. Why not…the markets and our investment portfolio values continue to grow each and every month. So, on paper, everything looks wonderful again.
So, what’s a person supposed to do? Most working Americans use their 529 and 401k plans as the number one vehicle to save for college and retirement. I’m no financial expert, but it is easy to see that without year to year gains in tax free (or tax deferred) investments in these types of products, it would be almost impossible to save enough money for critical long term needs. Of course, this is a double edged sword because all that money invested may not be worth much of anything in three, five or nine years when the market quite possibly crashes again.
This reality is truly an untenable enigma (at least in my mind). The only seemingly rational move I can think of is to diversify whatever wealth/money one has into a variety of different investments (like real estate and plain old savings accounts) and to become that much wiser to any situation where our markets are rising too quickly for no apparent logical reason. Apart from that, we all need to never forget that anything that looks or feel too good to be true, is just that. So, don’t get hoodwinked again into believing that our financial markets are anything more than organized gambling.