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Why you shouldn’t try to beat the market or rely on stocks for the long run

Michael Santoli
Michael Santoli

Now that we’re five years past the world-shaking financial crisis and markets have grown calm at lofty levels, investors can safely set aside macroeconomic matters and cultivate their own little financial garden, right?

Sorry, but no, says Cullen Roche, a widely followed economic blogger and financial consultant. In his new book, Pragmatic Capitalism: What Every Investor Needs To Know About Money and Finance, Roche argues that an increasingly complex and interconnected world economy requires that investors understand the basic workings of the financial system and the way the macroeconomy alters familiar investment tenets.

The exponential growth of the global population, broadening world trade and ubiquitous technology have intertwined all economic actors – individuals, companies, governments and central banks – as never before.

Roche cites research suggesting that 71% of market movements are driven by macroeconomic moves versus company-specific developments. Big company revenues are increasingly drawn from across the globe, so-called emerging economies now produce half the world’s output and the correlation in market movements across countries has increased dramatically over the past two decades.

The flow of money, managed by central banks and mediated by the banking system, is the crucial force making this intricate economic machine go. Roche goes so far as to argue that “understanding the monetary system and the financial world around us has become a crucial element of modern human life,” informing everything from asset allocation to political arguments.

While the financial crisis brought intense attention onto the financial system’s “plumbing” and close scrutiny of official interventions in the economy, these are not synonymous with a clear understanding of how money is created and animates economies.

Roche tries to rectify this comprehension gap, beginning with an elemental definition of money and its role in a modern economy and moving on to a detailed, valuable – if sometimes dense – discussion of the modern monetary system.

One key myth that he seeks to upend is the idea that the Federal Reserve’s “quantitative easing” bond-buying program is somehow fundamentally different or more radical than what the Fed has always done – regulate the supply and price of money through open-market operations.

Bringing it down to more tangible investor concerns, Roche takes a tour through some innate behavioral tendencies that tend to impede investor success on the way to isolating several more myths of financial life.

He argues against the idea that it’s important to “beat the market,” and more controversially challenges the notion of “stocks for the long run,” as he discusses in the attached video.

Roche’s wish is that investors approach savings and investment in a more holistic way, understanding that life and wealth accumulation aren’t linear, predictable processes.

Some other choice “myths” he seeks to debunk include the idea that commodities are a proper asset class, and that your house is a good long-term investment.

Those who complain that the Fed has constructed a financial house of cards with “printed money,” or that the dollar is destined to crumble from “money printing” and U.S. government debt will also find strong, sober arguments in opposition to these points.

But what are the chances these folks – who have been lamenting these supposedly ruinous policies through the economic recovery and bull market - will accept such reassurances with an open mind?