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- Investing in Stocks, Bonds, Real Estate, More
How much money can you make from investing in the stock market -- how much have investors made and how much can I make?
Most people have an outlandish perception of the stock market
Companies issue initial public offerings or IPO's, when they go public. The stock is traded in the secondary market henceforth. I am appalled at the skewed ideas propagated among amateur investors. First of all, you cannot expect to make double digit returns. It is hotly debated just how well stocks have fared, on balance, compared to other investment vehicles. Some people argue that "over the long run", stocks outperform other financial investments.
Stocks have made an abysmal showing in recent years
If we go back to late 2008 (September 15, 2008) after the collapse of Lehman Brothers, we can see that stocks were pummeled to brutal lows, and respected observers were even calling for the Dow Jones Industrial Average (DJIA) to bottom out somewhere around 5000 points or lower. In fact, if we just look at the decade of the 2000s (aughts), we see that the three major indexes all posted losses. The Standard and Poors 500-Index (S&P 500) posted a loss of ~24% for the decade; the DJIA posted a loss of ~9%, and the more volatile NASDAQ, cleaved ~44%. Stocks actually lost money in the 2000s. That means you would have been better off digging a hole and stuffing it with cash to be retrieved in 10 years, than investing in a broad stock market index.
US government bonds trounced stocks over the decade, and those bonds that are backed by the US government are considered virtually risk-free. Veteran market analysts that hold a positive outlook for the future, only predict aggregate returns of 7% or 8% over the long term for US stocks. But, just how long is "long term?" Ten years is a long time in my estimate, and I think there comes a point in a person's life -- or after it -- when the long term becomes a euphemism for never.
Nonsense -- this guy doesn't know what he's talking about
Antagonist: My uncle is a millionaire thanks to the stock market
Me: Okay, so what are you trying to imply?
Antagonist: There is plenty of money to be made; and I know many people who've done well with stocks. Those numbers you gave above are bogus.
Me: Those numbers are valid, because they represent the returns for major stock indexes. Your uncle probably picked stocks that outperformed the broader market, which is quite a rare accomplishment. According to the Efficient Market Hypothesis, all publicly available information is reflected in the price of a stock; and since the US is considered semi-strong efficient, it is probably impossible to beat the market, on a year to year basis. Your uncle bought and sold those stocks the same way a gambler wagers on craps; sure, he won the bet, but hadn't he cut and run and instead kept on betting, he would in all likelihood, be a pauper.