by Archie M. Richards, Jr., CFP^®
January 24, 2005

In the short run, the stock market can't act as we'd like. Here's what would happen if it did:

1. Good news comes out. Prices stay down long enough to allow those who want to get in to get in. Prices then rise.

2. Bad news comes out. Prices stay up long enough to allow those who want to get out to get out. Prices then fall.

Here's why this doesn't happen:

• When good news comes out, the chances are the market has already risen. Prices generally anticipate news about 4-to-6 months in advance. If you buy and sell stocks on the basis of current news, you're already too late. Even if you learn about current news before anyone else, you're still too late.

  When surprisingly good news comes out, the prices don't wait around giving everyone who wants to take advantage a chance to get in. Both the potential buyers and potential sellers learn the news at the same time. For the prices to stay down, the potential buyers would have to be observant, while the people who already own stocks would have to be dense.

  This isn't realistic. We're all observant and dense at the same time. (Well, I am, anyway.) The people already in the market are just as observant as the potential buyers. After learning about the surprisingly good news, the sellers aren't willing to sell at the same old prices. They want more. The prices discount the news within seconds. The only ones who benefit are those who are already in.

  Surprisingly bad news is also discounted immediately. If you're already in the market, you can't get out in time. The market moves too quickly.

• Good news and bad news don't alternate. All kinds of news come out all the time. It's a jumble out there. In the short term, the market is an unpredictable mess.

• If short-term trading were easy, we'd all say, "Let's go, guys!" We'd hock our houses, our furniture, our jewelry, and even their spouses (sorry, you can't have mine). We'd jump into the market, margined up to the hairline, buy at the right time, sell at the right time, and come out millionaires with no trouble at all. But even millionaire wouldn't be enough. It took Bill Gates decades to make his billions. We'd feel we could surpass him in just a couple of years. Trillionaire is what we'd want; nothing less would do.

  Nope, the stock market won't let everyone become trillionaires. Wealth isn't created by the stock market. Oh, it helps, all right. It allocates capital to business ventures that have the greater likelihood of success. But the stock market isn't the main producer of wealth. The main producers are the people of the world who are working to benefit themselves and their families. They're thinking, designing, digging, growing, fabricating, and servicing. They produce more wealth than they personally need. Wealth accumulates, benefiting us all and making stock prices rise.

  But stock prices can't get too far ahead of the real wealth. The market can't let everyone get rich quick. The market isn't a person, of course. But it acts like one - an ornery cuss at that.

  The market makes short-term investors wrong most of the time. If you think you can outsmart it, you're heading for trouble. Buying and holding for the long-term, with annual rebalancing, is the best way to go.

In a recent column, I wrote that $1.5 million "isn't all that much" to support a man and wife in retirement.

George wrote me that $1.5 million is indeed enough. He thought that if the goals of my readers are unattainable, they might "lose all hope."

Thank you, George. You are correct. Let's say the retired couple withdraws 5 percent income per year. On $1.5 million, this comes to $75,000. Despite the withdrawals, the portfolio still has good growth potential. As it appreciates, the 5-percent income does too.

The retired couple also has Social Security income of at least $10,000. With income totaling $85,000, they'll do just fine.

I must have been writing in a weak moment. Continue investing for retirement, dear reader. Don't lose hope.