On the Seeking Alpha version of my post the other day about how risky stocks are or are not a reader left a comment whereby he thought my post validated his preferred investment style. This was very interesting.
For purposes of this short post it does not matter what his preferred style is, he read something and came away believing it was an argument for his approach. Clearly something behavioral is at work here. This is not a shot at the reader at all--I do this quite regularly and I expect I will in the future. Chances are many of us do the exact same thing.
Obviously we read articles or blog posts that don't validate our respective philosophies, I believe that reading things that take the other side of your argument can help expand your viewpoint some or maybe learn about the flaws in your style. All styles have flaws, except for mine....JOKE JOKE JOKE, so it is important to understand the drawbacks to what you do to help mitigate the consequences of these drawbacks.
Along the same lines understanding the pros and cons of your style could also help reduce the risk of seriously hurting your portfolio or your clients' portfolios (if you work in the business).
If somehow serious damage is done then you probably need to find a new style altogether. I don't necessarily define down 50% in a down 50% world as serious damage (although I believe in trying to avoid it) because this can be mitigated some, not completely, with proper asset allocation for people with time to participate in the recovery and also by mentally preparing for such an outcome. What I mean is if you hire a hold on no matter what indexer to manage your money then he should let you know well in advance of what will happen the next time the market tanks. He might tell you you will go down with the market and we will rebalance at such and such a point as an example.
Serious damage includes things like loading up on penny stocks (people still do this), putting 50% into a can miss biotech that misses or misusing options as three examples. Hopefully these sorts of things would be individuals learning the hard way but you never know.
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6 comments:
Are bonds going out of favor?
depending on what you mean I have thought treasuries have been expensive for years and they kept getting more expensive.
I just read an interesting book called "The Little Book of Behavioral Investing", James Montier. It discusses points you made in your blog.
bonds going out of favor?
really? if you have owned them as part of a well thought out portfolio then you shouldn't fret over a decline in price. you will be better off by reinvesting interest a higher prices.
a review of basic bond mathematics is in order.
meant to say higher rates, not prices
7:52 how much bond interest are you pulling in that it is enough to buy more bonds? (this is a rhetorical question) Or do you mean bond funds?
I would say retirees would take no solace from your comments as many of them take the interest to live on.
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