Disadvantages in Buying Stocks and Bonds
- By buying into the popular line that stocks and bonds are the best investment opportunity around, you are likely to overlook equally lucrative investment opportunities, such as building your own business. The majority of the super-rich on the Forbes 400 (www.forbes.com/2008/09/16/forbes-400-billionaires-lists-400list08_cx_mn_0917richamericans_land.html) built their wealth through business ownership, rather than through security speculation. And the 700-plus millionaires surveyed for Thomas J. Stanley and William D. Danko's 1996 bestseller "The Millionaire Next Door" view business ownership as the best way to build wealth.
Building one's own business is by no means an easy task, but the money you invest can be directed in ways that add tangible value to your wealth based on your own judgment. By contrast, funds raised through stock and bond issues can be used for acquisitions or expansions you may think unwise. Those funds can even be used for frivolous expenditures such as the purchase of multiple corporate jets or lavish renovations of executive offices. - To build a diversified stock or bond portfolio costs considerable time, money and effort. Mutual funds are the smarter bet, but half of all actively managed funds do not beat the stock market indices. Buying index funds is even smarter because they are cheaper, but you are still subject to considerable market risk.
- Finance professionals receive and process information far more quickly than individual investors can. Brokerage firms employ small armies of information gatherers and analysts; you will read information they processed three days ago in newspapers and make your investment decisions based on that old information. Given their use of high frequency trading and sophisticated forecasting methods, you, as an individual investor, have little chance of beating the market on a consistent basis even if you quit your job to day trade full-time.
- The financial industry frequently creates new financial products, yet regulatory authorities do not create regulatory measures rapidly enough to ensure these products do not have an adverse impact on the overall economy. The subprime mortgage crisis of 2008, for example, involved the securitization of mortgages, and while an entire industry of mortgage securities arose in the early 2000s, there was little federal or state regulation. When these products proved detrimental to the U.S. economy, stocks and bonds were adversely affected. Other financial disasters, such as the dot-com bubble and the bailout of hedge fund Long-Term Capital Management, demonstrate a definite lag between financial and other innovations, and the implementation of appropriate regulatory measures. Until regulatory implementation can match the rate of innovation, individual stock and bondholders are always at risk of extreme market downturns.
- If you are concerned about the cost of the trading fees inherent in building a diverse portfolio, you should invest in stocks and bonds indirectly through no-load mutual funds.
However, if you want no exposure to stocks or bonds at all, consider buying real estate securities. Buy gold or other commodities, or trade commodities securities. Or try trading currencies, among other forms of speculation.
But security speculation requires you to compete with professional money managers and investors with greater resources than you have available. Consider buying real estate as an investment property. And one of the best nonstock investments you can make is in yourself. Investing in higher education to increase your own earnings potential or in your own business, is a solid way to build wealth.