So am I richer today than I was three weeks ago? No. In this article, I list 15 ways that I have lost because of the stock market decline.
The point is that almost everyone does better in a world with a rising stock market. We all have exposure to stocks even if we don't own any directly.
That means that owning a lot of stocks is a form of doubling-down, tripling-down, quadrupling-down on risky stocks. Most people would do much better if they had less exposure to stocks and other risky assets.
|Stock Market pain|
15 ways that Chicken Little has been hurt by the decline in the stock market.
Direct Financial impact
1. Decreased pay this year.
I am a college professor with no official salary in the summer. For the past few years, I have been given summer money. This money comes from the University endowment. When the endowment does poorly, there is no summer money.
2. Decreased chance of keeping my job.
I am an Associate Professor; in two years, the university decides whether to keep me permanently ("tenure" me) or fire me. The worse the financial situation, the fewer professors who will get tenure.
3. Decreased chance of getting the next job.
The lower the stock market, the lower my chances for getting another job in the event that I am fired in two years. I am now over 55 years old; there is a very good chance I will never get another job.
4. Decreased chance of my wife's startup company raising money.
My wife works for an amazing start-up company that produces healthful food for toddlers. The company is just getting started and needs to sell more stock to fund operations in coming years. The lower the stock market, the harder it will be for my wife's company to find investors. This is both because potential investors themselves are poorer after the stock market decline, and because large publicly traded stocks are now much cheaper. For example, Apple now trades for $97.05/share, down from $134/sh. last year. My wife's company has to look like a better investment than Apple (and all other opportunities); Apple is a lot cheaper than it was.
5. Decreased chance of my wife getting a different job.
If my wife's startup company does not succeed or, if she leaves for any other reason, her chances for getting another job are worse.
Indirect Financial Impact
|We love our kids, but we want them to move away|
6. Higher future federal taxes.
The worse the stock market does, the higher my future federal taxes. A rising stock market boosts tax revenue, a falling market decreases revenue. If the falling stock market indicates, or causes, an economic decline, then federal government revenues will decline further. Finally, if the economy weakens, federal government spending will increase. So federal revenue goes down and expenses rise along with a weakening stock market. Thus, the federal deficit increases, which has to be covered at some point.
7. Higher future state taxes.
A declining stock market causes higher state government deficits for the same reasons as the increase in federal government deficits. Furthermore, most states have severely underfunded pension plans. Those pension plans are underfunded even assuming that the investments in those funds will earn 7% a year. Low, or negative, returns to state pension plans will have to be made up by higher taxes, or some other method.
8. Higher future medical expenses.
The worse the budget condition of the federal and state government, the more they will shift my future medical expenses to me.
9. Decreased future social security payments.
A lower stock market leads to lower social security payments for the same reasons that it leads to higher medical cost. The Federal Government has all manner of modifications it can make to lower social security payments without defaulting. Higher retirement age, higher tax rate on payments, lower cost of living adjustment, etc. When the government is broke, it will figure out a way to cut social security.
10. Increased future costs of supporting my children.
The worse the stock market does, the greater the chance that my kids will not find jobs. Thus, my expected cost of paying for them living back at home increases.
|Berlin bank run|
11. Lower career prospects for my children.
Beyond the financial cost of supporting my children, they are likely to be less happy if they cannot find jobs. The unemployment rate for recent college graduates in Greece and Spain, for example, is currently close to 50%.
12. Increased chance of being a victim of crime.
If the faltering stock market indicates a worsening economy, then there will be more desperate people around. We have to expect those people to do what they can to take care of themselves and their families.
13. Increased chance of decline in social order.
By similar logic, the worse the stock market does, the greater the chance that social order will unravel. There are many countries in the world where it is unsafe to go outside after dark.
14. Increased chance of war.
Economic decline increases the chance of disorder at the national and international level. Would Russia be in Ukraine and Syria if oil prices were higher and the Russian economy was booming? We can not know the answer for sure in the case of Russia, but just as desperate times cause individuals to take risky actions, desperate countries are dangerous.
15. Increased chance of disease.
There are many other correlates of stock market declines. Stock market declines have been argued to cause increases in disease.
Conclusion: Everyone "owns" a lot of stocks even if they do not own a single share.
In a rising stock market, we will be able to drive our cars through peaceful streets. Our children will call from distant cities us to complain about their irrational bosses. The government will be able to pay a lot of our medical bills, our pensions, and make social security payments. The chances for peaceful times will be higher.
The worse the stock market does, the worse our outcomes. The specifics differ for each of us, but the message of the same. We all own the stock market.
What is the answer? With our savings, many of us have far too much invested in risky assets. Most people would do much better by selling significant portions of their risky assets. Furthemore, it is important to get out of the stock market ahead of everyone else. It is neither too early, nor too late to sell some of your stocks.
Direct Financial impact
1. Decreased pay this year
2. Decreased chance of keeping my job
3. Decreased chance of getting the next job
4. Decreased chance of my wife's startup company raising money
5. Decreased chance of my wife getting a different job
Indirect Financial impact
6. Higher future federal taxes
7. Higher future state taxes
8. Higher future medical expenses
9. Decreased future social security payments
10. Increased future costs of supporting my children
11. Lower career prospects for my children
12. Increased chance of being a victim of crime
13. Increased chance of decline in social order
14. Increased chance of war
15. Increased chance of disease