Capitalism is Stronger than Shady Traders

I agree with a post Paul Krugman wrote about the unproductive nature of a lot of the financial trading activity these days.

When it comes to investing, there are a few point where I respect Krugman’s stance.

First, he doesn’t give stock picks. He is clear about saying macroeconomic analysis is often disconnected from the behavior of stocks and the overall stock market. He’s certainly right about that.

Second, he is quick to point out the unproductive nature of a lot of the financial industry (I would actually say a lot of it is counterproductive).

I disagree with his University of Chicago bashing, especially surrounding the investment theories that led us to index funds and other low cost, passive mutual funds. These are some of the few financial innovations that have actually had a positive and powerful impact on society.

Don’t let sketchy traders keep you from investing long term

I am writing this post to remind readers that, despite the unproductive and even malicious nature of many traders and the financial industry, it doesn’t need to effect you. And it certainly should not deter you from making a financial plan and investing for your future, as long as you do it right.

Now, you can be effected if you are trying be an active trader yourself. If that is your plan, you have just jumped in the tank with the other sharks. Maybe you look at technical analysis. Maybe you place stop orders….you know…all that stuff that brokerage firms encourage in their advertisements. If this is the case, you have made yourself vulnerable.  These vicious and unproductive traders are your adversaries, and your adversaries may be faster and smarter than you are. After all, they are there to be on the winning side of your trade and take your money.

But if you follow my kind of advice and invest in low cost, long term investments, then who cares what these traders are doing? Let them trade all they want. Let them fight with each other over fractions of a penny on millisecond trades. Long term, this doesn’t effect the stocks or bonds you own. Long term, capital markets keep growing, companies keep paying dividends, bonds keep paying interest, and technology creates new opportunities.

It’s like safely watching a feeding frenzy of sharks from a perch high above the water. The carnage might be interesting to watch, but there is no reason to jump down into it.

Photo by thetaxhaven