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Over the past two decades there have been numerous high profile scandals in the stock market, ranging from the Bernie Madoff ponzi-scheme to the Enron scam to the systemic victimization of trusting customers by some of the largest financial companies in the U.S, many of which directly contributed to the global financial meltdown.
This definitely created some ‘trust’ problems for Wall Street, and consumers seem somewhat more aware of the dangers of entrusting their money entirely to someone else. But most people continue to do it anyways, presumably because they either think there is no alternative, or that the problem has been largely resolved, or that the problem is just with a few bad apples and not institutionalized across the entire stock market.
Back in 2014, 60 Minutes broadcast the findings published in Michael Lewis’s book Flash Boys: A Wall Street Revolt
, which documents the systemic, institutional rigging of today’s stock market by insiders who have made tens of billions of dollars exploiting computerized trading. He documents how the stock exchanges, Wall Street banks, and high frequency traders have paid billions of dollars to get advance notice of stock market prices and orders, just a “flash” (a few milliseconds) before everyone else. That is all the time computerized algorithms need to play your order against other orders in ways you don’t know about or understand, such as knowing what you are in the process of buying so they can quickly purchase the stock a few milliseconds before you, drive up the price, and then sell it back to you a few milliseconds later at the slightly higher price. This form of “front running” is not technically illegal, and Lewis explains that the insiders are making money on virtually every trade, millions of times a day, and racking up tens of billions of dollars in profits at the expense of literally everybody who invests in the stock market.
It took an extremely sophisticated investigation to uncover the front-running scheme, because today's computerized trading is so complex that very few people understand the precise mechanics of it, and it is precisely that complexity that disguises what is happening.
Well, there is likely very little you can do to transform the institutional advantages that Wall Street insiders have, as those will continue to be re-invented even as some get discovered or shut down. Furthermore, the dangers of investing with a crook (or an amateur, which can sometimes be even more expensive than a crook) will always be there as long as you are surrendering your money to someone else and relinquishing control (for which you also pay some mega-fees by the way).
You do, however, have the opportunity to buy and hold residential investment property, which is a hard asset that you own outright and directly control. We are talking here about deeded freehold real property of course, not some real estate backed security, which would fall into similar potential problems as any other traded paper asset.
Residential investment property is not very complicated to understand. You own the property, you lease it out to a tenant, rent comes in, expenses get paid out, you anticipate future vacancy and maintenance and factor those into your cash flow estimates. That doesn't mean all properties are a great investment, but it means that with some basic education, most people are able to understand the fundamentals of how the asset class works. This is very different from investing in derivatives, let alone something as secretive as a hedge fund, and now even something as seemingly basic as buying and holding blue chip stocks, as documented by "60 Minutes" above.
Residential investment property is a physical structure so a crook cannot run away with it in the middle of the night and an amateur cannot lose it all for you on a bad stock market bet. It cannot evaporate in a financial scandal. It could of course decline in value with market fluctuations, but it has intrinsic value and will not go to down to $0 like shares in so many scam-companies did.
Even if you use a property management company to collect rent, handle maintenance, etc., you still own and control the asset. You can always hire a different property manager if you want, but you are the one who selected the asset, who bought the asset, and you are the one who owns and controls the asset. You have not surrendered your money to someone else. A property manager is hired by you to manage the asset (not to select which asset to invest in). A property manager reports to you and can be fired by you. You are the one who makes the decisions. You are empowered. You are in direct control.
As the stock market schemes continue to be unveiled, one after another, the value of being directly in control of your investments should become more clear and apparent. After watching so many people's retirement accounts get wiped out over the last decade, more people are looking for alternatives. This doesn't mean 100% of your investment dollars need to be in real estate, but increasing your position in hard assets like residential investment property increasingly puts you in control of your family's financial future and, at minimum, is a solid hedge against the next stock market scheme. Particularly in this day and age, learning how to retire on cash flow properties is a very worthwhile endeavor.
We are not legal, tax, or financial professionals. The content on this page is for informational purposes only and should not be construed as individualized advice. It is your duty to consult with your own tax, legal and financial professionals about your individual situation, applicable laws, and the suitability of any investment property for you personally. All real estate investing involves risks, which buyer assumes, and no specific returns can ever be guaranteed by anyone.
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