Are stocks really for the long run?

Do we really have such short memories, Justin? I remember maxing out my 401K early in the decade, and after 9/11 having the balance stay just about static for almost two years before it started to increase. And that included my contributions, so for almost two years I was losing an incredible amount of money. Eighteen months after that (the beginning of 2005), the balance had tripled.
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Now, as you might imagine, the balance is back down, and I have no good reason to say that it will turn around in the next 10-15 years (my time horizon). But history tells me it might, and quickly. And do I really have any reasonable alternative? Especially as I work in a field (increasingly common) where experienced and (relatively) high-salaried people are the first ones up against the wall when the revolution comes? In other words, my job at my salary is unlikely to last until I am financially ready to retire. I have to be ready whether I am or not.

To make a long term bet on the stock market, you have to believe that the future is going to be more or less like the past. In particular, you have to assume that economic growth will continue for decades.

While it would be great if the economic expansion continued indefinitely, I believe it has to stop eventually because of environmental constraints. I don't know when this will happen. However, global warming, shortages of fresh water, and dwindling oil reserves make me think growth will stop sooner rather than later. The end of growth will be something new. It hasn't happened before. While I don't know for sure, my guess is that the stock market won't be a good place to keep your money if economic growth peters out.

What's the solution? Make safe low-yield investments. You will need to save a greater fraction of your income or work longer to compensate. I believe it is better to be frugal and be prepared than to aim for a posh early retirement and end up in the soup kitchen lines when the market tanks.

Good call on Jack Bogle's book.
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The three most important questions in investing are:
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1) Do you have a stable job or good long-term career prospects?
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2) What is your time horizon? In other words, how old are you, how long will/can you work, and what will you do the day you retire?
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3) Do you have a sufficient cash fund to let you ride out a bad year?
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Without those 3 things, talking about stocks, investing in 401ks, IRAs, etc. is meaningless. What is scary in America is that most folks don't have those 3 things or at least one aspect of that 3-legged stool is either missing or impaired.
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So for many Americans, investing is an afterthought. Right now, most should be embarking on a path to financial stability. We need a sort of right the ship approach in this country. Get educated and make sure your career aspects are stable. Put a good bit of money aside to handle a year's worth of rainy days and reduce/eliminate your credit risks. Finally, invest according to your time horizon. The simple rule being Long=liberal and Short=conservative.

Justin,
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Quick question. And you know how we lawyers feel about questions...
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What happens when my parents (baby boomers) all begin withdrawing money from the stock market? To my knowledge, this is a global phenomenon. Given that the pool of available investors WILL (we know this to be true) shrink and global economic activity WILL (also a given) contract, isn't it true that the maxim about investing in stocks and obtaining growth in 20 to 30 years may not hold?
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Further, why is it that Bill Gross currently hold $0 in stocks??? I recognize that he is an older guy more near to the twilight of his years, but he has substantial assets. What does it say when he won't even sip the kool-aid?

Cheer up !

BUGGER OFF YOU BAILOUT BASTARDS
(Bugger Off, Irish Drinking Song)
WilliamBanzai7

HAPPY ST PATRICK'S DAY 2009

Sing along: http://www.youtube.com/watch?v=jbrzZWLu6Qw

Chorus:
So bugger off, you Wall Street bastards bugger off! (Fook Yu!)
Bugger off, you deadbeat bastards bugger off! (Fook Yu!)
Like a herd of bloody swine that refuse to leave the trough
You'll get no more this evening so you bailout bastards bugger off

AIG you've been a lovely bailout zombie, but oh the time does pass.
So don't you all be bettin' the Feds won't kick you in the ass.
You've been a splendid bailout basket case, but enough is enough.
We'd take it very kindly AIG if you'd all just bugger off!

Chorus

Here's to all the bankers and lawyers who've been servin securitized beers,
and puttin up their knoxious greed and their stupid drunken schemes.
So leave your money on their table when you go,
tomorrow you'll have a sorry head and nothin left to show

Chorus

Here's to all them bailout bag ladies who might be waitin with pans in their hands,
and thinkin one of them might make a charmin one night stand.
Please don't be offended girls this song is not for you.
Uncle Sam will be happy to oblige you to get this nasty job through.

Chorus

So Timmy G you've been promisin these bailout bag ladies a night of lovin bliss,
but truth be told your far to drunk on bailout swill to stand up straight and piss.
So give it up you lousy sod you'll not be gettin laid.
and the sooner that you're out the door the sooner Uncle Sam will get repaid.

Chorus

So bugger off, you Wall Street bastards bugger off! (Fook Yu!)
Bugger off, you deadbeat bastards bugger off! (Fook Yu!)
Like a herd of fooking swine that refuse to leave the trough
You'll get no more this evening so you bailout bastards bugger off

@bryan: I had this same concern (being a younger boomer). I've since read analyses that indicate that it isn't a problem, though I can't locate any at the moment. Part of the reason is that your fewer investors assumption simply isn't true, for a number of reasons (more people in the stock market, more younger people than older people in general, more international investors, and so on). Global economic activity may contract in the near term, but we hope that is a temporary thing.

@bryan: I also think that an increasing number of people in the workforce will, well, retire involuntarily before their time; that is, have their jobs shot out from under them. In some cases, that might be because they are high-salaried, but in others, companies just don't seem to last as long these days (I've had several fold during my employment, and it may not be entirely my fault).

Curmudgeon,
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So what you are saying is that even though we know that net global populations will either decline or cease growing in the future, this will have no effect on the stock market because:
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1) There are more people in the market.
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I'm not sure that I buy that. It stands to reason that a larger available pool of investors would lead to a larger number of actual investors. The contra also being true.
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2) More younger people than older people.
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But we know right now that this is not the case. The baby boom generation is disproportionately represented throughout the world in terms of numbers. I know I should cite some data here, but I am making my case expediently.
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3) More international investors.
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This may very well be. So we will see a growth in the percentage of investors from a smaller investor pool as more countries develop and modernize spreading wealth by the effects of globalization. But like all things, the proof is in the pudding. I would have to see this to believe it.
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Finally, global economic activity is certain to contract in the near and mid-term. Much of our recent expansion was fueled by 25 years of funding by Easy Al. Those spigots will soon be turned off once we stabilize the ship and slow plodding growth and debt repayment from our being over-leveraged will be the new normal.

As long as you're well diversified, I see buying (American) stocks as investing in American industries. I highly doubt we will stagnate in the long run so I see buying stocks as a good investment in the long run.
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In the short run there's of fear, which leads to volatility / losses, but that's only the short term.
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-MBirchmeier

-blarg... subscribing to comments.

@bryan: In response I have to google population growth rates, which I do in a shortcut fashion since I'm under deadline on several paying projects. According to Wikipedia at http://en.wikipedia.org/wiki/World_population_estimates, it looks like the current world population is about 6.9 billion, with a projected stable population of something over 9 billion past 2050. Doesn't look like net population is declining to me. Although you may be able to make the case that in the near term the investing population may decline due to the general dissatisfaction with markets in general. But net world population is likely to continue to grow for some time.

If your e-mailer sells now, she 'locks in her losses.' But so what? There's nothing wrong with that. The money has already been lost.

When you unload the crap, you move the money to an investment that you want to own. Why hold onto garbage?

Please do not send your readers to know-nothing financial planners. They look good in a bull market because their advice is almost worthless. But how do they protect clients from disaster in a bear market? Answer: They don't because they do not know how.

Your readers want to learn to hedge (reduce the risk of owning investments). That's the key and planners have no clue.

Mark
http://www.mdwoptions.com/freebook.pdf

To make a long term bet on the stock market, you have to believe that the future is going to be more or less like the past. In particular, you have to assume that economic growth will continue for decades.
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There are two questions here -- the possibility for continued economic growth, and how the stock market will react to that growth.
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I think that US economic growth remains possible IF the economy itself AND the rewards of the growing economy are properly balanced -- and that means getting away from the 'buzz-word' economic models ("service economy", "information-based economy") which produce nothing tangible, and start making stuff again. (and yeah, that means a period of protectionism). And as long as the emphasis in on higher wages for workers rather than bigger profits for investors, economic growth can be sustained indefinitely --
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But that doesn't mean the market will "recover", because the equitable distribution of the benefits of economic growth means that "profits" will be given to workers, and not reported as earnings.
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IMHO, we're still in a bubble-- as this chart of the lifetime "Dow" suggests... http://tinyurl.com/56pw7l
to me the bubble started inflating around 1984 (when the Reagan recession was over and his fat cat tax cuts kicked in) and the dow stood at 1211 (Oct 1, 1984). On October 1, 2003 it was at 10454.
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Media household income in 1984 was $37767. In 2003, it was $43318.
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The stock market grew by 863% while media income grew 14%. To put it another way, stock prices went up 61 times faster than median household income -- and if the stock market had gone up at the same rate as median income, it would have been at 1389 in 2003....
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So I wouldn't count on a stock market "recovery", at least in the long term. Current policy seems to be about reinflating the bubble (the wall street bailout, the "stimulus" package) rather than actually creating good, sustainable jobs for US workers.