The calm trust that pays dividends

In the annals of gardening, no one who has been the least bit attentive has failed at tomatoes. Tomatoes start out looking tender and fragile, but with a little water and care they prosper.

Sure, a gardener can get better yields by pruning and fertilizing, but 99 percent of what a tomato does is made possible by sunlight and an inherently competent plant.

That’s a little like the stock market, the subject of Schuyler Velasco’s cover story (which you can read here). Some investors pay close attention. They analyze data, hover over performance, worry about when to hold or when to fold. That might improve their yield. It might also be futile.

Active investors lose money just as passive ones do. No style is a proven winner over time – which is why financial planners are so insistent that an index fund is probably the safest way to invest for most people most of the time. An index fund doesn’t try to beat the market. It mimics the market.

It’s been only six years since the meltdown of 2008, scarcely enough time for people to forget the widespread fear of that fateful year. Many of the certainties that people growing up in the 1950s, ’60s, and ’70s felt they knew – that prosperity moves in a straight line, that things always get better, that the market might fluctuate but in the end always rises – were severely tested by 2008. That was compounded by a feeling that the market was rigged, as evidenced by big-money dominance, insider-trading scandals, dodgy items such as collateralized debt obligations, and microsecond computer manipulation.

Was the 2008 stock market just being the market? Or was something fundamentally different happening? As Schuyler points out, those who saw the downturn as similar in type though greater in drama than many downturns that had come before did what smart investors have always done: They bought low in ’09 and rode the upturn. Those who were traumatized by ’08 and felt that nothing would ever be the same have tended to steer clear. Because of the damage done to optimism by the ’08 crash, there is a growing gap between people who own stocks and those who don’t.

So is the market healthy again, or is today’s bull market just another bubble getting ready to burst? Those are questions no one can answer, but they stem from a fundamental dichotomy we face in everything from our jobs and relationships to the news we read: A short-term trend might or might not signal a major change. The protest movements that swept the Middle East in 2011 looked to some like a new birth of freedom. The violence currently sweeping the region looks to some like the apocalypse. Neither is likely to be the long-term outcome.

That is why it is worth taking a breath every once in a while and remembering that tomatoes and stocks, the economy and world news, pretty much take care of themselves. We can hover and worry. Or we can trust.

John Yemma is the Monitor's editor-at-large. He can be reached at yemma@csmonitor.com.