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The Biggest Lies Ever Sold To The Investment Public


Graham Summers

The general public had stocks foisted on them in the 80s with the introduction of stock-based retirement plans (401ks and IRAs). They became further enamored by this asset class with the creation of online discount brokerages, which seduced the DIY spirit.

Stocks have become so popular that there are entire peripheral industries have been built surrounding them: investing books, investing seminars, investing TV shows, etc.

And yet no one has ever asked whether investing in stocks is actually a good thing.

In reality, owning stocks isn’t all that great. I don’t mean during bear markets – I mean in general. When you get done reading the lies detailed in these articles, you’ll likely come to the conclusion that stocks as an asset class are not only highly overrated, but that owning stocks can in fact be a colossal waste of time.

Lie #1: Stocks make money from price appreciation.

Just about everyone talks about investing in stocks from a price appreciation perspective. “Buy low, sell high” so the saying goes.

Well, historically dividends have accounted for 70% of all stock market gains.

According to a study performed by the London Business School, when you remove dividends, stocks have returned a mere 1.7% in average annual gains over the last 109 years. To put this into perspective, this is less than you’d make from owning long-term US Treasury bonds (2.1%) over the same time period.

Indeed, if you’d invested $1 in stocks in 1900 and reinvested your dividends, by 2009, you’d have made $582 (adjusted for inflation). Take out dividends and you’d have only seen $6 from price appreciation. Yes, $6 from 109 years’ worth of capital gains.

Put another way, by focusing solely on capital gains when it comes to stock investing you’re only doubling your money about every 18 years (remember, this analysis simply focuses on the returns generated by the market – which outperforms most professional and individual investors).

So unless you’re buying stocks with dividends, you’re likely not making diddly in the long-term.

Lie #2: A bull market in stocks increases your wealth.

Everyone and their mother likes to babble about whether we’re in a new bull market. The reality is it doesn’t matter. There have been ENORMOUS periods of time in which stocks didn’t make ANY money when you account for inflation – and that INCLUDES bull markets.

Case in point, research from the London Business School shows that stocks didn’t make a CENT in purchasing power in France from 1912 to.. 1977: a whopping 65 years.

Put another way, some three generations of investors in France didn’t actually increase their purchasing power by owning stocks.

Indeed, the US is currently experiencing a similar period in which stocks rise but FAIL to increase purchasing power for investors. Consider that since the Tech Bubble stocks priced in Gold have FALLEN nearly 90% indicating in plain terms that most of the gains we’ve seen in the market are a result of easy money and US Dollar devaluation.

Meanwhile, inflation is on the rise. Food prices are at record highs and only going higher. Executives at clothing retailers are warning that prices could rise by as much as 15-20% by the Autumn. Cotton is up 44% so far in 2011. And even the Fed’s phony measures show that vegetable prices are up 13%!

Make no mistake, higher interest rates are coming and coming fast. The Fed has spent Trillions trying to lower interest rates (more on this in a moment), and it’s now officially lost control of the long-end of the Treasury market and food prices.

This will have ENORMOUS implications for the US housing market and financial system. Housing prices will be collapsing in the coming months as interest rates soar. We could also very well see another 2008-type event (a collapse of the US Financial System) as well.

Why?

Derivatives.

In 2008, the entire financial system nearly went under due to the Credit Default Swap market which was $50-60 Trillion in size. In contrast, the interest-rate based derivatives market is $196 TRILLION in size: more than THREE times larger than the credit default swap market at hits peak.

At this size you only need a very small percentage of these derivatives to be “at risk” (meaning real money is bet on them), say 5% to get $10 trillion in potential losses. To put that number into perspective, the entire WORLD STOCK MARKET is only $36 trillion in size.

See the potential risk here?

To say that the US financial system is in danger would be a HUGE understatement. It is the derivatives market, NOT the housing market that has the Fed concerned.

Make no mistake, we are rapidly descending into an inflationary disaster. If you haven’t already prepared your portfolio for this, NOW is the time to do so.

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One Response

  1. […] Visit link: The Biggest Lies Ever Sold To The Investment Public […]

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