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Is The Stock Market A Ponzi Scheme?

9 September 2009 2 Comments

A ponzi scheme as defined by Wikipedia is:

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned.

While the above definition does not distinguish new investors from old investors, this is an important and common characteristic of Ponzi schemes; namely, old investors are paid with money from new investors.  So, how does this apply to the actual stock market?

In a recent article on Yahoo, Robert Kiyosaki talks about how the baby boomers NEED new investors to put adding money into the stock market so that they can successfully withdraw retirement funds without bringing down the entire market.  Remember, stock prices are just a function of the balance of buyers and sellers.  If you have more sellers, the stock prices goes down.

Baby Boomers Will Be Doing Lots of Selling

In the coming years, the baby boomers are dependent on selling shares in their retirement funds to fund their lifestyle.  There is no doubt about it: this large segment of our population will be doing way more selling than buying.

What keeps share prices up, then?  Well, the freshly earned 401(k) contributions from the younger generations.  Will we have enough contributions from young investors to keep a nice balance of buying and selling?  What if we don’t?  Would the government potentially take over our retirement contributions for us to ensure we are “saving enough”?  Maybe we can call it Social Security 2!

Ponzi schemes are destined for failure.  Let’s hope that the stock market isn’t.  Boy, I wish there were more optimistic things to blog about these days.

2 Comments »

  • Tina said:

    Well, technically the 401k is supposed to have some cash, bond or stable value type investments to pick from in addition to stock investments. The big question being – are we smart enough to diversify into them, and will they outpace the rate of inflation.