Behavioral Finance

The Greatest Redistribution

While we fret over taxes, the greatest wealth redistribution of all time is happening under our noses—in the stock market.

The greatest redistribution of wealth—of all time—is well underway, and it's happening right under most folks' noses. It's not billions; it's trillions. It's got nothing to do with politics or taxes, tea parties or stimulus bills, bloated budgets or indebtedness.

It's got everything to do with the stock market.

No way can any tax change compare to the awesome magnitude of wealth redistribution when a bear market changes into a bull.

We're constantly bombarded with headlines about the "trillions lost" in the bear market. But think it through. Those "trillions lost" in stock market value will one day be back to where they were and even higher. (Probably much higher and sooner than most can envision.) I can't say exactly when, but it will happen. In that process, those who stayed in stocks, or bought more while they were down, will be benefactors of this gargantuan wealth redistribution. Those who lose their wits—the "it's different this time" and "we'll never get back to where we were" crew who sell and say "never again" to stocks—will pay that tax by sitting in some other asset (like cash or bonds) while stocks roar back. It happens every cycle and the redistribution of wealth is vastly larger than any tax adjustment ever conceived.

Back in October, I said it was a "simple choice" to be a stock investor—valuations had gotten so far out of whack you either bailed in and believed sometime, at some point, markets and the world would recover. Or you bailed out and believed the economic world as we knew it was ending (in which case money is better spent on canned goods, bunkers, and clean water). Hyperbole? Maybe, but barely—think back to how most felt during the panic of late ‘08. The "simple choice" is the crux of the greatest wealth redistribution, and already those who stayed in the market are reaping big benefits.

We hear a lot about paying our "fair share" to society. Be my guest! You don't even need the government to do it! Long-term stock investors can pay much more than their fair share by selling and/or staying out of stocks now. Here's how:

  1. Focus on the ultra short-term: Bull markets typically begin before economic data turns. This is because stock markets ultimately price in the future, not the past or present. Waiting for an "all clear" from backward-looking economic data will make you late to the party. This is especially important because the lion's share of gains typically happen in the first months of a bull.
  2. Focus on dour sentiment: Headlines will typically remain dour and worries will persist long after the bull market starts. That's why bulls are known to climb a "wall of worry" in their beginning stages.
  3. Believe it's different this time: Known as the four most expensive words in the English language, folks will always believe it's different this time—but it never is.

Obeying any of these three rules will allow you to divest your wealth to others faster and more efficiently than the IRS could ever hope. Meanwhile, encourage those who need the wealth to buy the stocks you won't touch. Sitting in cash for the beginning of a bull will make you more "equal" in wealth relative to the rest of the investing community in short order.

Investing is a discipline—much more a discipline than a genius' game. Warren Buffett is famous for quipping, "Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." But folks often get investing discipline backwards because its logic feels perverse. Cash feels safest but usually isn't. For long-term investors with aspirations to grow their money, or even just preserve its value, (that is, most of us), the most dangerous thing they can do is be in cash. Simple truth: The odds overwhelmingly say that just sitting in stocks for the long run—through the ups and downs—yields a stock market-like return, which over time is way better than cash or bonds. Better than any liquid alternative, though more volatile. If you can add value by sidestepping a few bears, so much the better. But either way, when new bulls begin and old bears die, wealth redistribution hits high gear.

Those who stuck it out or bailed into the market this year will be the benefactors of the greatest wealth redistribution there ever was, while the cautious investing masses pay a hefty toll for waiting in nervous disbelief as the market climbs.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.