How do we know the stock market will produce returns to the investor over the long term? We don’t, but it is well worth the risk.
There is a lot of criticism of corporations today. They are “greedy” and “exploit workers.” CEOs are paid too much. In recent decades wages have become stagnant. Jobs are being sent overseas where labor costs are cheaper. As an American investor, I would like to add a bit of perspective to all of these concerns.
We live in a capitalistic society. It is not perfect, but it is the best system when considering the net benefit to society. Adam Smith’s “invisible hand” is still alive and well. Our resources are efficiently allocated based on supply, demand, competition, and the profit motive.
While corporate manipulation of Government power is a valid concern (by the way, it is not only corporations that use Government to regulate to their own advantage), they are risking their capital and competing in markets. That process provides cheap goods and services to all consumers. If the middle class vanishes, who can afford those products and services? If so, demand will lessen, profits will fall, and prices will fall until demand is restored.
When I joined the Air Force in 1980, I was an E-1. That is the lowest-paid rank in the U.S. military. After four years, I was an E-4. Still not really a “living wage” based on the political rhetoric we hear today. Yet, I saved over $4,000 over that period, paid off my car, and was debt-free. So, if I seem a bit unsympathetic when people tell me they “don’t make enough money to have any savings” now you know why. Even as a “poor person,” I managed to invest $4,000 in the stock market, and that made me one of those “greedy capitalists.”
The point here is not to start a political argument, but to point out that anyone can own corporations and receive “their share” of the resulting profits or losses. That’s right, investors too risk their capital, not just those who own their own business outright.
Today, older and wiser, I know that investing in one company has much more risk than spreading the money across 2000 of them. There are no guarantees for what the net profitability of corporations will be, but I do know we are in the same boat, and that anyone who has the work ethic and motivation to risk their capital has the ability to do so. Saving money in the bank is not going to be enough to keep up with inflation over the long haul, or to meet long-term savings objectives. You have to take some risks in life. I believe that, taken together, corporations will produce profits for their investors over the long term. Nothing is stopping you from being an owner but the willingness to save and risk it to attain your goals.
If you invest internationally, then you are also diversified against the returns of any single country. You are essentially investing in the corporate returns of the planet!
If you hate corporate cronyism as much as I do, then vote for politicians that favor more limited Government and less regulation. Corporations use Government because Government is big business. Make Government small, and you remove the motivation. Companies manipulate Government to manipulate the regulation of business to their own competitive advantage. That usually harms small businesses the most. Remove this advantage to large businesses, and you increase competitiveness and efficiency for all businesses, large and small.