Why “Average Joe” Can’t Make Money in the Stock Market

by | May 10, 2008 | Asset Management, Point and Figure

The period we’re in now is not necessarily a “bull market” or a “bear market” but more like a structurally “fair market.” I didn’t make that up on my own — Tom Dorsey, from Dorsey Wright and Associates in Richmond coined that term. I think that makes a lot of sense. From 1982 up through 1999 we were in a structural bull market. And everyone became conditioned to buying the market any time it pulled back.


But since late 1999 — 2000, conditions have changed. Anyone who has bought on the dips has not been rewarded. The easiest yardstick to use to measure this structural “fair market” is the S&P 500. In May, 1999, the S&P 500 reached 1375 for the first time.

Remember that number — 1375.

In May of 2000, the S&P 500 was again 1375.

In January 2001 the S&P 500 was at 1375.

In March 2007 the S&P 500 was at 1375.

In April 2008 the S&P 500 was at 1375.


In a structural “fair market” there could be several periods where the stock market can run up 20% and several periods where the stock market can drop 20%. And when the dust settles — you’re usually right back where you started. And that’s essentially what’s been happening since 1999. The point I try to drive home is if you’ve been a “buy and hold investor” you’ve made no money — no progress — in nine years.


No progress! But you are nine years closer to the day you’ll NEED the money. This is why the average Joe can’t make money in the stock market.

Oh — something else — there have been studies showing these phases of the market can last between 15 and 20 years.


It is so important to know when the market is on offense or defense. We have a specific tool, the bullish percent index, which tells us specifically when the risk in the market is high and when the risk in the market is low. We use this tool to determine when to put money into the market, and when to take money off the table. Simply using the “set it and forget it” approach is a bad business plan.


The reason for going through this piece is because nearly 70% of all money — all money — in mutual funds sits in the same 500 stocks — the S&P 500. The S&P 500 is primarily a large cap mutual fund. If you look at the top 25 holdings in most large-cap mutual funds, you will see the same stocks — over and over and over.


From my side of the desk, I chuckle when somebody tells me “they’re really diversified” and then show me a handful of large-cap mutual funds. They may own six or seven different mutual funds, but those funds hold the same stocks. That is not diversifying your money.


Also, if you look at the menu of choices in your deferred comp plan, your retirement annuity or 401(k) plan at work, you’ll notice that (often times) more than two thirds of your choices are large-cap mutual funds.

Look, Average Joe has the odds stacked against him — but you don’t!

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