This year is the first year of my life that I have ever had stock in a company. I didn’t go out and buy it though, it was *gifted* to me as a performance bonus which was nice. I was unable to access it for a long time, so I had a much time to look at the market and study economics (which I had little exposure to before).
As soon as I could access my bonus, it felt like a smart move to sell it so I could put it to savings because of what I learned about the current state of the stock market.
Right now, most Fortune 500 companies are at an all time high. The high value of the market is fine and dandy until you realize that’s also the reason why it’s hard to make any money off of stocks right now. The prices are so high, it’s difficult for the average taxpayer to move high volumes of stocks. All the common man can do is invest in a company, and hope that it continues to see a net linear growth over several decades. That’s not fast enough for anyone who is trying to leave the rat race before the end of their career.
It’s not a buyers market right now, it’s a sellers market- and that can be a very dangerous thing.
When you buy a single stock in a company, the overall value increases. If you buy 10 or so shares, you’d never see the impact of your trade. If you buy 10,000,000 shares- you will almost certainly see the value of the stock increase with your purchase. The inverse is true if you sell. If you sell your shares, it devalues the stock. Working with the same rules, selling low volumes doesn’t do much. Selling large volumes, however, can devalue a stock. If one or a group of individuals sells a very large volume of stock, it can trigger more people to do the same because they see the value of their precious stock depreciating.
Furthermore, we are overdue for a market crash. In 1999 there was the dot com bubble, followed by the 2008 housing market bubble. in 2017 right now, there is the central banking bubble- caused in part by the insane amount of debt from the first two crashes. Similar to the conditions before 1999 and 2008, the market has never appeared stronger.
I really like this graph because it clearly shows the prior two crashes next to what appears to be a third one on it’s way. Label A is the start of the dot com bubble, and B is low point from it. Similarly, C is the market value before the housing bubble and D is the resulting low point. E, on the chart is right now. This graph doesn’t mean 100% that the market will crash of course, but it points to a very disturbing likelihood of a future crash.
For the record, I am not trying to bash stocks as a passive income steam. It’s definitely one! But I think the risks of crashes, lack of liquidity, and the average return on investment (~5% per year and slowing down (source)) make stocks an unattractive choice for someone trying to leave the 9-5 within 5 years.
For example: If invest $100000, after 5 years I would have ~$128000. That’s a little over $5k per year, which is about $400 a month. Granite, the average person (including myself at this time) can’t make a $100000 investment that will make them that extra $400 a month. But it does outline the potential for stocks to provide a supplementary income for some.
Only 54% of Americans have stock (source), and the average portfolio has about $12000 (source), which means that about half of Americans bring in about $40 extra bucks per month ($500 a year) on average. The other 46% doesn’t have any stock at all.
One last point I would like to make is the lack of return on investment for the amount of time spent researching stocks and markets- often looking for opportunities to make a lot of money day trading on volatile stocks. Some of my friends invest hours of their week trying to decide what to buy, when to buy, what to sell, and when to sell. They may spend between 5-10 hours each week at a minimum. If they have an average portfolio, at 5 hours a week, they may spend over 250 hours of their time just to make $500 per year. Basically, they make about $2 an hour.
In summary, Stocks are a source of passive income, but they are only an optimal source if you can move large volumes of stock. Stocks are risky and require time to maintain, watch, and trade which will impact how ‘passive’ the income really is. For someone living in the 9-5, I think it’s better to sell everything in your portfolio and save your money. Wait out until the next crash when stocks will be cheap, your investment will go much farther. That will be your time to strike.