meep (![[info]](http://l-stat.livejournal.com/img/userinfo.gif){kind=small} meep) wrote,@ 2008-10-01 17:38:00 |
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Investment advice: in general
This should not be totally new in concept to you, but mainly a reminder of general principles:
Look at money from a total cash flow perspective
There are two parts I encourage here:
1. Match assets and liabilities
2. [as jay says] Spread your bets
I don't have too much time here to explain everything, but I want you to think from a global perspective. Too often, when people think about money and investments, people compartmentalize in "buckets" -- "this is my car fund", "this is my mad money", "this is my rainy-day fund" without thinking about the relationships between these buckets' performances.... the correlations, if you will.
I'm going to reach back to some conversations I had with various people during the tech boom then bust. These people were making their money in the tech field. They had stock options in their companies, =and= stock of their company. Their annual bonuses were closely tied to how well their company was doing in the market. That is most definitely putting all your eggs in one basket. Some of these people "diversified" by cashing out options and equity and buying stock.... of other tech companies.
Okay, that's not spreading your bets. And there's spreading your bets in more than one way - it's not all a cash proposition. Human capital comes into it as well. For example, I've got lots of numerical skills, some tech skills, lots of teaching skills (I'll be working on my bow hunting skills later). My current career is heavily invested in insurance and financial services in general. So if I've got extra cash, I'm not going to double down in the finance industry -- to diversify I can go into medical services, commodities, international manufacturing -- anything not directly related to my direct livelihood.
Spread your bets doesn't mean hold stock in a bunch of different companies -- those could all be whale oil ventures or buggy whip manufacturers - and they all can go down together.
Then I just read an article in the WSJ today about people who held bank stocks for generations, stocks that had been generating income via dividends.... and that was their only holding. Also reading about people in Charlotte with large bank holdings. Dude, if your locality is heavily dependent on certain industries, you sure as hell shouldn't be doubling down the bets there -- if your community depends on the steel industry and you hold only steel stock, and then steel goes belly up, you're doubly or even triply screwed.
So spread your bets means from a global perspective. Look at what your exposures are in terms of industry, geography, your own career, etc. You need to look to see if you're over-extended in any particular area. Now, you can make a calculated risk by putting all your eggs in one basket and really watching that basket, but if you have no real control over that basket, then you're a fool. Putting all your eggs in one basket can make sense if you started a business and you're the manager. It doesn't make sense if you're just a small-time stockholder. If you're not Warren Buffett, you probably can't have much impact on the management of a business that you're not the CEO of. (and even then, it can be a little questionable.)
Secondly, look at it from a total cash flow perspective. I don't really care about numbers on paper. Until it's cash on hand exchanged for actual goods or services, it's just a way of keeping score. It can be a reliable way of keeping score, but as we've seen over the past year, you can't always count on that.
So when you're looking at investment choices, you need to consider what cash flows you're looking at on all sides. You probably have debt of some kind - can be fixed or variable rate. The rate can be low or high. You can have different payment horizons on this debt. You need to take this debt into account when determining what you're going to do. I'm not against debt, but there's no doubt that some people can't handle it.
Likewise, you've got income from a career. Some careers are more stable than others, and have different growth patterns, and different retirement ages. Your future earnings -- your human capital -- is an asset just like any stock or bond. It may be harder to quantify, but not as hard as you might think. (consult an Actuary (TM) today! Risk is Opportunity!)
Other assets you can have are stocks, bonds, options, real estate, annuities, etc.
You may have various liability risks, such as health care, taxes, various living needs -- some of which can be hedged through insurance products and various investments in financial assets, some of which can't be really hedged away (I just checked with God and my mortality tables: you're going to die eventually. Not much the financial markets can do to get rid of that. Though if you check SENS.....)
Yes, this is all very complicated. The good news is that one need not be overly precise to get good results. But you do need to be cognizant of your real financial position. Too many people think only in terms of their 401(k) portfolio, or their IRA, or their brokerage account, without taking into considerations all the risks they want to ameliorate (or can hedge), and without thinking from a total lifecycle perspective.
There can be such a thing as too much saving, if you are reducing your pleasure in life eating cat food (though that can be expensive) to save for a retirement you may never have. But likewise, I hear too much about people who have all their financial assets in equities when they're retired -- dudes, you've got some fixed flow liabilities and you have no fixed flow assets other than Social Security flows, which really aren't that much, especially given that too many people retire at age 62.
So while I have a new job doing one thing, I'm thinking of starting up a consultancy business (I'm going with General Services, LLP as my enterprise name, as I want to include Stu.... we may not walk dogs, yet, but we've got a wide range of things we can offer to the market) - I've never liked being dependent on one source of income. I don't have much capital saved up for my cash to produce much income for me (I did spend considerable capital from 1996 - 2002, when I was a grad student, and decided to use the money from my dad to pay for experiences I would mainly enjoy as a young person.... indeed, many of the things I did 10 years ago, I have no interest in now. Enjoyed them then, though.)
Anyway, some real practical tips for a market in high volatility:
1. Don't trade a lot. Unless you like losing a lot of money. Though I guess Vegas has worse odds....but realize you're gambling if you're going to day trade.
2. If you need cash in the short term, dammit, you should have had more money in cash-like securities and not equities. But given where you are, just get the cash you need. Hiding greenbacks under your bed isn't going to help much. Especially due to the very high inflation I'm thinking is on the way over the next two years.
Did you know that Social Security is going to get one of the highest COLAs in the last 20 years soon? And cotton paper isn't that good of an insulator if you were thinking of stuffing your sweater in lieu of heating your home this winter. Get a friend and some blankets and snuggle up. Also, alcohol gives a illusionary feeling of warmth, so seriously, don't get drunk and freeze your ass to death. I speak as one who cares and would really like to stop stupidity (though I know it's the fifth universal force). Okay, Grandpa Simpson rant over.
3. If you don't need cash right now, for God's sake don't look at your portfolio. Wait until things calm back down again to rebalance. The likelihood is that if you act now, you will lock in losses.
4. Most people my age (mid-30s), just chill out. If you're in retirement years, guys, seriously, you need more in fixed income vehicles (though not 100%). If you want to know more about annuities, yes, talk to me. Some are scams, but people really need to protect against longevity and senility, frankly. There may come a point when you can't reasonably control your cash flow, and having a good fixed income stream beyond Social Security may be a good idea.
5. Unless you're about to drop dead, holy crap, don't take Social Security at age 62. Talk to me, seriously.
I know you're thinking "I thought she said she didn't have much time" and "Where the hell did this Jeremiah pop from?" but I could go on for thousands of words. I have heard plenty of things from friends and family that just want to make me run into a wall sometimes (don't take it personally). There needs to be some perspective. There are plenty of positive things going on, which is why I'm telling people not to cash out everything. But you can't just be blase about it.
I know that something for nothing is one of the oldest, most seductive come-ons to humans ever ("oh yes, if you eat this fruit, you'll know everything there is to know! No downsides!"), and it's pretty nice to think about someone else fixing your problems and it will be all unicorns and Jason Mraz (um, uh no comment.... =sigh =). If you'd like to hear about disaster preparedness, Stu and I can talk to you about that as well. A lot of this is a mindset: not pessimism, per se, but thinking of all the possibilities and trying to ameliorate the ones you don't like as well as boosting the probabilities of the ones that you do like.
It's called risk management. Risk never goes away, and I've taken lots of risks in my life (mwa, Stu). Some have paid off, and some have caught fire in front of us (mwa, Stu). But I'm not hanging onto the edge of the cliff without the proper gear. I've got my backup plans, my belays, my life insurance policy.
Yes, the financial world sucks right now (sucks for someone whose career is concentrated on the financial world), but it's far from the first time there's been a liquidity and credit crunch. And there's lots of real assets out there that makes the landing a lot softer than in my grandma's day, when she wore a dress made from a flour sack (though she told me the burlap was a pretty fine weave, I doubt it was as fine as the Mathcamp Tshirt I've got on right now.)
Anyway, that's my jeremiad for today.
This should not be totally new in concept to you, but mainly a reminder of general principles:
Look at money from a total cash flow perspective
There are two parts I encourage here:
1. Match assets and liabilities
2. [as jay says] Spread your bets
I don't have too much time here to explain everything, but I want you to think from a global perspective. Too often, when people think about money and investments, people compartmentalize in "buckets" -- "this is my car fund", "this is my mad money", "this is my rainy-day fund" without thinking about the relationships between these buckets' performances.... the correlations, if you will.
I'm going to reach back to some conversations I had with various people during the tech boom then bust. These people were making their money in the tech field. They had stock options in their companies, =and= stock of their company. Their annual bonuses were closely tied to how well their company was doing in the market. That is most definitely putting all your eggs in one basket. Some of these people "diversified" by cashing out options and equity and buying stock.... of other tech companies.
Okay, that's not spreading your bets. And there's spreading your bets in more than one way - it's not all a cash proposition. Human capital comes into it as well. For example, I've got lots of numerical skills, some tech skills, lots of teaching skills (I'll be working on my bow hunting skills later). My current career is heavily invested in insurance and financial services in general. So if I've got extra cash, I'm not going to double down in the finance industry -- to diversify I can go into medical services, commodities, international manufacturing -- anything not directly related to my direct livelihood.
Spread your bets doesn't mean hold stock in a bunch of different companies -- those could all be whale oil ventures or buggy whip manufacturers - and they all can go down together.
Then I just read an article in the WSJ today about people who held bank stocks for generations, stocks that had been generating income via dividends.... and that was their only holding. Also reading about people in Charlotte with large bank holdings. Dude, if your locality is heavily dependent on certain industries, you sure as hell shouldn't be doubling down the bets there -- if your community depends on the steel industry and you hold only steel stock, and then steel goes belly up, you're doubly or even triply screwed.
So spread your bets means from a global perspective. Look at what your exposures are in terms of industry, geography, your own career, etc. You need to look to see if you're over-extended in any particular area. Now, you can make a calculated risk by putting all your eggs in one basket and really watching that basket, but if you have no real control over that basket, then you're a fool. Putting all your eggs in one basket can make sense if you started a business and you're the manager. It doesn't make sense if you're just a small-time stockholder. If you're not Warren Buffett, you probably can't have much impact on the management of a business that you're not the CEO of. (and even then, it can be a little questionable.)
Secondly, look at it from a total cash flow perspective. I don't really care about numbers on paper. Until it's cash on hand exchanged for actual goods or services, it's just a way of keeping score. It can be a reliable way of keeping score, but as we've seen over the past year, you can't always count on that.
So when you're looking at investment choices, you need to consider what cash flows you're looking at on all sides. You probably have debt of some kind - can be fixed or variable rate. The rate can be low or high. You can have different payment horizons on this debt. You need to take this debt into account when determining what you're going to do. I'm not against debt, but there's no doubt that some people can't handle it.
Likewise, you've got income from a career. Some careers are more stable than others, and have different growth patterns, and different retirement ages. Your future earnings -- your human capital -- is an asset just like any stock or bond. It may be harder to quantify, but not as hard as you might think. (consult an Actuary (TM) today! Risk is Opportunity!)
Other assets you can have are stocks, bonds, options, real estate, annuities, etc.
You may have various liability risks, such as health care, taxes, various living needs -- some of which can be hedged through insurance products and various investments in financial assets, some of which can't be really hedged away (I just checked with God and my mortality tables: you're going to die eventually. Not much the financial markets can do to get rid of that. Though if you check SENS.....)
Yes, this is all very complicated. The good news is that one need not be overly precise to get good results. But you do need to be cognizant of your real financial position. Too many people think only in terms of their 401(k) portfolio, or their IRA, or their brokerage account, without taking into considerations all the risks they want to ameliorate (or can hedge), and without thinking from a total lifecycle perspective.
There can be such a thing as too much saving, if you are reducing your pleasure in life eating cat food (though that can be expensive) to save for a retirement you may never have. But likewise, I hear too much about people who have all their financial assets in equities when they're retired -- dudes, you've got some fixed flow liabilities and you have no fixed flow assets other than Social Security flows, which really aren't that much, especially given that too many people retire at age 62.
So while I have a new job doing one thing, I'm thinking of starting up a consultancy business (I'm going with General Services, LLP as my enterprise name, as I want to include Stu.... we may not walk dogs, yet, but we've got a wide range of things we can offer to the market) - I've never liked being dependent on one source of income. I don't have much capital saved up for my cash to produce much income for me (I did spend considerable capital from 1996 - 2002, when I was a grad student, and decided to use the money from my dad to pay for experiences I would mainly enjoy as a young person.... indeed, many of the things I did 10 years ago, I have no interest in now. Enjoyed them then, though.)
Anyway, some real practical tips for a market in high volatility:
1. Don't trade a lot. Unless you like losing a lot of money. Though I guess Vegas has worse odds....but realize you're gambling if you're going to day trade.
2. If you need cash in the short term, dammit, you should have had more money in cash-like securities and not equities. But given where you are, just get the cash you need. Hiding greenbacks under your bed isn't going to help much. Especially due to the very high inflation I'm thinking is on the way over the next two years.
Did you know that Social Security is going to get one of the highest COLAs in the last 20 years soon? And cotton paper isn't that good of an insulator if you were thinking of stuffing your sweater in lieu of heating your home this winter. Get a friend and some blankets and snuggle up. Also, alcohol gives a illusionary feeling of warmth, so seriously, don't get drunk and freeze your ass to death. I speak as one who cares and would really like to stop stupidity (though I know it's the fifth universal force). Okay, Grandpa Simpson rant over.
3. If you don't need cash right now, for God's sake don't look at your portfolio. Wait until things calm back down again to rebalance. The likelihood is that if you act now, you will lock in losses.
4. Most people my age (mid-30s), just chill out. If you're in retirement years, guys, seriously, you need more in fixed income vehicles (though not 100%). If you want to know more about annuities, yes, talk to me. Some are scams, but people really need to protect against longevity and senility, frankly. There may come a point when you can't reasonably control your cash flow, and having a good fixed income stream beyond Social Security may be a good idea.
5. Unless you're about to drop dead, holy crap, don't take Social Security at age 62. Talk to me, seriously.
I know you're thinking "I thought she said she didn't have much time" and "Where the hell did this Jeremiah pop from?" but I could go on for thousands of words. I have heard plenty of things from friends and family that just want to make me run into a wall sometimes (don't take it personally). There needs to be some perspective. There are plenty of positive things going on, which is why I'm telling people not to cash out everything. But you can't just be blase about it.
I know that something for nothing is one of the oldest, most seductive come-ons to humans ever ("oh yes, if you eat this fruit, you'll know everything there is to know! No downsides!"), and it's pretty nice to think about someone else fixing your problems and it will be all unicorns and Jason Mraz (um, uh no comment.... =sigh =). If you'd like to hear about disaster preparedness, Stu and I can talk to you about that as well. A lot of this is a mindset: not pessimism, per se, but thinking of all the possibilities and trying to ameliorate the ones you don't like as well as boosting the probabilities of the ones that you do like.
It's called risk management. Risk never goes away, and I've taken lots of risks in my life (mwa, Stu). Some have paid off, and some have caught fire in front of us (mwa, Stu). But I'm not hanging onto the edge of the cliff without the proper gear. I've got my backup plans, my belays, my life insurance policy.
Yes, the financial world sucks right now (sucks for someone whose career is concentrated on the financial world), but it's far from the first time there's been a liquidity and credit crunch. And there's lots of real assets out there that makes the landing a lot softer than in my grandma's day, when she wore a dress made from a flour sack (though she told me the burlap was a pretty fine weave, I doubt it was as fine as the Mathcamp Tshirt I've got on right now.)
Anyway, that's my jeremiad for today.
