Liberty MavenThe Market: Should We Cue The Violins?
June 27th, 2008 3:44 pm | by Alexander Drummond | Published in Free Market, Individual Responsibility, Investing, Maven Commentary, The Free Investor | 3 Comments
Yesterday, the Dow Jones Industrial fell over 3 percentage points, a drop of well over 300 points. Sadly, these kinds of swings hurt small investors far more than they do institutional investors; many individuals see the large drop and immediately sell. On the surface, such a move makes sense. Rather than face further losses, one should leave the market and cut one’s losses.
Why doesn’t this logic hold up? Long-term growth and broker fees.
Over the long-run, these volatile swings in the market tend to be corrected by general economic growth. Timing the market can work; however, many small investors are not quick enough to catch these trends in time to maximize earning potentials. Moreover, many investors fail to rationalize their reasoning for their purchase. Often enough, purchases have as much to do with an investor’s whims and emotions rather than a thorough analysis of fundamentals. As Benjamin Graham, the famed value investor, once said: “The individual investor should act consistently as an investor and not as a speculator. This means.. that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.”
What can an investor do to avoid dangerous sell-offs like many made yesterday? Detach one’s self from the market. Purchase securities for their long-term growth potential. Better yet, purchase an index fund or ETF. SPDR (SPY) track the S&P 500, whereas Vanguard Total Stock Market (VTI) tracks the entire market itself. Either should provide, over the long-term, growth rates higher than that of the average investor. Since 1950, the S&P 500 has returned 8.66% per annum. Such a rate would mean that one dollar invested in the S&P 500 in the year 1950 would be worth $65.27 today.
Furthermore, make sure that your broker fits your need. With a long-term growth strategy, it makes little sense to have a full-service broker. Many full-service brokers, as well as some discount brokers, charge inactivity fees. These fees can range from $40 to $400 per year. Such a cut can be a significant portion of a client’s portfolio, and is removed regardless of performance.
As you are a long-term investor, stock transaction fees should not matter an incredible amount. However, it would still be advisable to find transaction prices below $15 a trade. Some online brokers, such as Zecco, now offer $0 trades to their investors. Another worthwhile feature of online brokers is automated dividend reinvestment; every dividend received is invested back into stocks as you indicate, compounding your growth further.
Next week, we’ll analyze high-dividend stocks, and why they’re often overlooked. Make sure that this week, which will perhaps bring further drops in the market, does not necessarily create a poor situation for us common investors. Rather, look at it as an opportunity for us to get into the market at a low-point. That does not mean we are entering a bull-market, as it is best to remain highly cautious during these severe dips. However, it is best to take a non-emotional approach to our investing, and remember the long-term outlook.
Alexander Drummond owns none of the stocks mentioned in this article.
June 28th, 2008 at 1:54 am (#)
Amazing, amazing.
June 29th, 2008 at 2:12 pm (#)
The whole idea of “securities” is unearned gain. Unearned gain from the pool of wealth can only come at cost to real producers — it deprives real producers of the very opportunity to receive for their production, an equal measure of the production of others, because unearned taking inserts itself in the chain of potential reward.
This of course is part of what’s “driving up” energy and food costs. It’s why millions are starving while food waits in storehouses until the starving can meet the price of the commodities trader who produces nothing and takes the vast share of potential reward for wealth.
These things are bad enough on their own, but given an underlying monetary system which itself can only multiply debt while we maintain a vital circulation by re-borrowing interest and principal as ever greater sums of debt, the competitive quest for unearned gain exhausts the last potential reward for real enterprise, even before inherent multiplication of debt by the monetary system imposes inevitable collapse under a terminal sum of debt we can no longer afford to service.
As both are coming to a head now; the smoke and mirror of “long term securities” can only hope to take profit from an unsustainable, bankrupt system.
Which of course is why, advocating these *un-free* markets of predation in the style of Mises and Paul, you can hardly afford a featured link to PEOPLE For Mathematically Perfected Economy.
Neither Paul, Vieira, Griffin, Mises, Browne, Hayek, or you advocate solution. And this? Essentially it advocates unearned profit at the expense for instance of multiplying public/federal costs, or the costs of our commerce, where, under mathematically perfected economy, the costs of unearned profit are eliminated, and “the markets” are truly freed, by solution of the devaluation of currency, and multiplication of debt by interest — something the Austrians actually *advocate* to our perpetual demise.
July 2nd, 2008 at 1:49 am (#)
[...] The Market: Should We Cue The Violins? Yesterday, the Dow Jones Industrial fell over 3 percentage points, a drop of well over 300 points. Sadly, these kinds of swings hurt small investors far more than they do institutional investors; many individuals see the large drop and … [...]