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moneysense.ca, 12/09/08
This and That # 109
- An article in the New York Times says that a marriage at its core is a financial union and offers guidelines to become more compatible with your spouse.
- Roger Lowenstein, the author of a brilliant book on the collapse of Long Term Capital Management, finds parallels between that crisis and the current one.
- Rob Carrick’s offers a ‘stay the course’ message in response to the latest market turmoil.
- Ellen Roseman writes about people who have accumulated the wealth of a prince but continue to live as a pauper.
- Preet points out that Benjamin Graham, the father of security analysis, questioned whether the enormous effort expended on stock picking was worth the cost.
- Million Dollar Journey offers tips on giving yourself a financial check-up.
- Michael James explains why the wiring of our brains offers insights into the mistakes we make in investing.
- Clever Dude says that everyone can be a personal finance rock star.
- Blunt Money on the ten common obstacles to wealth.
- Money Ning explains why renters need home insurance.
Have a great weekend everyone!
moneysense.ca, 12/09/08
Thanks for the mention CC! Enjoy the weekend.
Ditto – thanks for the link CC, and have a great weekend.
There’s been a lot of people writing “stay the course” messages. To everyone reading them, ignore those messsgaes and DO NOT STAY THE COURSE AT ALL. Especially in the last week of the month – that’s when all my automatic investments are made. If you can sell off all your investments right before I make mine, I would very much appreciate getting an even bigger discount on them
(Seriously though, sometimes people don’t want something until you try to take it away)
Richard: That’s a good attitude to have. If we are going to be net buyers, the low prices are good news, not bad. It is very hard to cultivate that attitude though!
Maybe it would be easier if there were more dividends so people could “see” an increasing yield – the price appreciation might be harder to really understand (and it’s true that sometimes it isn’t even based on reality). But if the stock market is a mechanism to transfer money from short-sighted people to me I can’t complain.
Thanks for the link. Have a great weekend!
I’m not saying that the sky is falling, in fact I’m invested in the stock market to a large extent myself.
But it’s worth keeping in mind that “Stay the course” has only really been valid in the USA and a few other countries this century.
Ask an investor in Germany (1930s), France (1940s), Russia (1910s), Japan (1980s), etc. how they did by investing in the stock market.
It is entirely possible that the USA will stagnate for years to come (10 year real performance of SP500 is still around 0%) and even a catastrophic failiure is not out of the question. It’s unlikely, but can happen.
To Anon: But the USA is the economic engine of the world. The statistics shows that almost all of the countries around the world are net exporters and the USA is the net importer of EVERYBODY’s goods. So, if you think the US economy will be stagnant over the next decade, then it would go to reason that the entire world’s economy will be stagnant for that same duration.
Although that may be your macro economic view – from an investment standpoint, that doesn’t necessarily mean that EVERY stock is going to be stagnant. For example, companies will continue to fight over market share no matter the size of the pie. Some of these stocks will be winners, others will be losers. The most famous example playing out today is Honda, which is continuing to post record sales and profits, compared to Ford, which is closing factories, losing market share and posting massive financial losses. Even though the overall automotive sales pie is getting smaller, Honda is continuing to grab more market share because they continue to produce high quality fuel-efficient vehicles that everybody likes…
In my humble opinion, even if the economy is stagnant over the next decade, the index investors may be just breaking even… But the stock picker who is invested in the best managed companies will continue to perform well as they may grab more market share in a shrinking or stagnant market.
Phil: the market may end up at the same place in 10 years (it wouldn’t be that unusual) but if your investments actually stay flat your timing is good enough to get struck by lightning as you win the lottery. Good investing means adding regularly, and unless the market closes for 10 years that means some of your purchases will be a lower prices during that time. In general you would probably be getting better and better prices over time since the real value of the market isn’t likely to decline by much, preparing you for the next bull market (unless you plan to exit your investments in 8 years). Some purchases will be at higher prices too, but between regular investments and dividends there’s a lot more to the story than the change in price between two arbitrary points.
This year is actually a good example – your 10 year performance would look horrible if you made a single investment in internet stocks in 1998 and didn’t do anything since then. Of course real investors have a different story, but it makes good headlines. What really matters is how much you need and when – as Stocks for the Long Run points out, if you’re saving for 30 years from now even ordinary bonds can be more risky.
[...] was kicked out for his cerebral palsy not being serious enough. I really liked this NY Times essay linked by Canadian Capitalist linking the LTCM crisis and today’s financial news. Nut graf: The concept of [...]
Anon: It’s true that equity markets have been kind to investors in only a handful of nations. However, as investors, we can’t protect ourselves against every possible risk. If US markets are terrible due to war or some other crisis, there will be few places to hide. Canadian markets, other developed markets and emerging markets will all be hit because as Phil points out the US is still the world’s largest economy by far.
Phil: It’s entirely possible that markets are stagnant for decades. However, stock picking will provide better than indexing results only if an investor succeeded in beating the index. In any type of market, whether bull, bear or stagnant, we run into the logic that investors as a group can only be average.
Richard: I agree with your analysis. Though it is painful, bad markets are a great news for asset gatherers. Even an investor who is 55 years old, has an investment horizon that is very long — as much as 35 years.
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