Wall Street Money Machine Breaks Down is about the 2007 mortgage subprime mortgage financial crisis. There is enough in these links to read about the mess, so I will not dwell on it. However, financial genius has also been cut down to size in the investing game, both professional and amatuer. So what should you do?
I was recently thinking of such a person, a person who had lost a whole lot of money in the stock market. On December 17, 2007, I checked what his horoscope predicted (Leo, July 23-August 22):
Confidence automatically breeds confidence as failure breeds failure. Do the things that you know well to build self-esteem.
So you are a social worker in UNICEF (or other UN agency), so what do you know about the stock market? Absolutely nothing, let us assume. However, you read money magazine one weekend about stock market strategies proposed by an expert. You learned something this weekend. Now you are an expert; at least you feel like one. So you invest some money in hot stocks and funds not realizing that you hardly know what you are doing. Therefore, you feel helpless or you are smart, bubbling with overconfidence.
Probably, you meet a pundit, who invites you for lunch and forecasts encouraging numbers to you and makes you look a fool. Now you suddenly have an advisor, and feel settled for good.
As I said before, investing through the ages is a long-term activity and no easy game. You need to have an opinion about the industry and its sectors, which direction interest rates will go and how the US dollar will fair with the prices of oil going higher and higher.
How about if you just don't care about all these market variables and focus on your social work instead. There is no shame is saying that you don't know something. It is even less shameful to say that you just "don't care." Therefore, just tell yourself that you don't know and don't care. Is it not better to do the things that you do well and build some self-esteem?
You will not need to know that Amazon.com is having a stock split or when Google is making an earnings announcement, or what Allen Greenspan is telling his successor.
All you have to do is follow one simple strategy. Invest in two total stock market index funds, say 70% in domestic markets and 30% in a total international index fund. Depending on your age, wealth and attitude towards risks, also put a percentage of money in a total bond index fund. One rule of thumb is that 100- your-age should go into stocks. So if you are 20 years old, 80% goes into stocks and 20% goes into bonds. Then put 70% x 80% (56%) in domestic stocks and 30% x 80% (24%) in international stocks. Thus the three index funds will have:
56% in domestic stocks
24% in international stocks
20% in bonds.
If you have sufficient cash flow, you may even afford to have 80% in stocks even at the age of 60-70 years of age.
Once you do all of the above, life becomes very simple. So, if your friend Jack puts you on the spot, this is how you could answer him. Let's assume your name is Jill.
Jack: Will interest rates go up?
Jill: I don't know and I don't care.
Jack: Will the US dollar appreciate against the Euro and the Japanese Yen?
Jill: I don't know and I don't care.
Jack: Will Ebay be issuing an earnings announcement soon?
Jill: I don't know and I don't care.
Jack: Will energy and gold stocks be going up in price?
Jill: I don't know and I don't care.
Your total stock market index funds (domestic and foreign) holds a piece of virtually every stock worth owning. Then you don't need to have an opinion of which stocks or industries or sectors will do well or poorly. The same position holds true with the total bond index fund. Your total bond index fund will have the mix of short-term, intermediate-term and long-term bonds and private versus government bonds, taking the burden from you of worrying which way interest rates move. Also, since you hold a bond fund you would care less or wouldn't care at all about bond maturity rates and bond prices in the secondary market.
However, excuse me, it seems obvious that you could have made a bundle if you had bought Google just after it's initial IPO. So why can't you jump in and buy Google right now? Google is a great company, a fabulous company, one of the best innovations of the Internet world, or probably also one of the best business innovations. Nevertheless, Google right now is a lousy investment because it is so expensive a stock. Most people unfortunately fail to understand that the stock price is reflected in the secondary market, it is not a price created by the company.
The way you can win the prediction game and not get cut down to size is by refusing to play the prediction game (I don't know and I don't care). Your first better know something about the perils of prediction so you can prevent overconfidence getting the better of you by not caring and not knowing the vagaries of the stock market. Of course, keep up-to-date with the news of the day (including the market news), but assume that your index investments will flow with the tide. At least these simple strategies will give you much self-esteem through your other skills (like your current occupation and other talents) and prevent you from trying to be a financial genius and getting cut down to size either by yourself or by the guidance of a pundit.
Related and important links:
The Pension Plan in the Extended Portfolio.
More Retirement Blues 2 - Investing.
Are You Too Late for the Party - Part 1?
Are You Too Late for the Party - Part 2?
References:
(1) Your Money & Your Brain by Jason Zweig. A must read for many of you interested in the stock market. Mr. Zweig has done a great job is presenting complex issues in easy and understandable language.
(2) For a knock-out read, but a bit heavy, try the two books written by Nicholas Nassim Taleb: Fooled by Randomness and the The Black Swan. Two incredible books, and a great writing style. Dr. Taleb may sound like a lonely voice in the wilderness, but it is these lonely voices that have the courage (the guts) to challenge the mediocre and challenge the already established beliefs that no one wants to change because they can feel comfortable with it or make money out of it. The Economist has tagged the Black Swan as one of the best reads in it's Pick of the Bunch for 2007.
Disclaimer: References to Personal Finance are strictly for "educational purposes" and does not hint or offer any specific financial advice. For financial advice, please seek the advice of a professional if you feel unable to handle your own finances..
grats
Posted by: intrinsic | March 19, 2011 at 06:27 AM