I'm sure you've heard it over and over "diversify your investments!" Remember, even Wu Tang Financial preaches it!
Well it's with good reason. To put it in layman's terms, you can hedge away the individual risks carried by stocks/bonds and only have market risk (which cannot be hedged away, even if you invest in multiple markets - usa, asia, uk, etc - because the global economy is so intertwined these days).
Even the AAA rated corporate bonds have something like a 0.2% chance they go busto within 5 years!! And now some financial firms have given municipal bonds (state govt bonds) a finite chance of defaulting. I've only played poker for roughly one week so I may be terrible at poker analogies, but let me pose this question to you: "would you put in your entire BR and your life savings with AA against 72o preflop?" I don't even know what the odds are in this situation but I think you can see the risk of putting EVERYTHING on the line. In a sense, I feel like smart poker players who play to win in the long run are essentially doing something analogous to diversification in terms of investment and financial management.
They say that the stocks:bond ratio is roughly 100-age into stocks and the rest into bonds. But when you do this, don't make the mistake thinking that this ratio only will make you "diversified". Not at all! You've got to get your money spread out into a variety of bonds, and a variety of stocks and other options if you choose. This is why so many people use funds and similar set ups where you can purchase a basket of items for a relatively small sum of money - or just buy S&P funds, etc.
If you really feel like apple's going to skyrocket (let's say you REALLY believed in the ipod before its launch) or got into the vmware IPO, PLEASE, PLEASE make sure that the sum of money you put into individual stocks is a very small proportion of your entire portfolio. I'm not an expert so I dont knwo the exact numbers, but think something on the order of 1-2% of your portfolio that you can "play" with.
I'll end with a frightening anecdote, and I'm sure there are many others like this. I apologize about the lack of details; the story came from someone about a month ago and the specifics escape me.
There was a man worth 2 billion dollars, head of a firm in Wisconsin or thereabouts. Obviously an intelligent, successful man who knew what he was doing... in terms of his business. The problem was that a massive proportion of his assets, about 90% or so iirc, was in stocks of his firm!! When the market that his firm was in crashed, his assets went from 2 billion down to 20 million. Now, as the head of a company it is difficult to get rid of your holdings in the company for various reasons, but still, this should serve as an example for why you MUST be diversified in your investments, even if that means you don't get the highest EV possible.
Another example, is how the Enron employees' 401k's were set up. I'm sure you can guess by now, but they were essentially pure Enron stocks - you can imagine the pain felt there. I hope those former employees are doing okay...
Maybe a lot of you aren't in a position to REALLY have to worry about this for now. But as you age, and have a family to support, YOU're the one that has to make sure that everything is under control and that your assets can withstand crashes like the one we're experiencing right now. For all we know there might be another crash coming in 30 years and you have to be prepared! I just feel terrible for the people who were set to retire in the next few years, who did not rebalance their portfolios properly to hedge for such risks. (I'll try to talk about "goals" in your portfolio management next time around)
Just keep it in the back of your minds, and hopefully when the time comes, you'll have people to ask for good advice. I'm willing to bet you that if you made a thread at LP.net, there will be good people still around willing to help you out (so Meat, it's up to you to keep the site running healthy for our sakes! <3)
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Half Pot!
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Silver_nz New Zealand. Nov 08 2008 05:33. Posts 5647
lol WU-TANG finacial, that was awesome xD
rest of the post was pretty useless unspecific and scaremongering rhetoric...
... but i agree! definitely a good idea for everyone to learn more about managing investments
On November 08 2008 04:47 rogier wrote:
not diversifying is like neillyAAing your portfolio
ROFLZ
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JoeDeertay United States. Nov 08 2008 12:44. Posts 1730
I guess this is like a bankroll management analogy post?
But yeah, I agree with everything you are saying anyway. I'm glad to be 20 right now, because as an econ major I can pretty much understand everything that is going on, sit back and watch, and when the dust clears in the end prices will be dirt cheap everywhere for me to build a sick retirement fund
It feels kind of strange, though, to be happy about market crashes and etc when everyone else is losing money in their 401k and my professors are telling me that they are "going to be teaching forever" because of it lol.
Variance has a big brother named doomswitch. - edzwoo
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Brasil. Nov 08 2008 12:33. Posts 5230
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