junkman
4-25-11, 8:05pm
Junkman, you clearly have a lot of knowledge/experience and have important points to make about different types of risk and how to build a portfolio that will do well over the long term, but it is unlikely that anyone is going to respond positively to being called ignorant. While you may find it frustrating that others don't see things the way you do, a more friendly/supportive approach may be more effective in helping them understand your point.
Yes. I could have used the “love sandwich” approach and said something like the following.
(1) Everyone is entitled to their own opinion.
(2) What an unnamed individual is proposing to do with her money will likely cause her harm.
(3) “Nice shoes”.
But stupid financial behavior is just that, stupid financial behavior. I could care less if she harms herself. But, also, it doesn’t benefit me to not try to stop it, especially when her fear-driven choice was the direct product of financial ignorance, namely, the very common misunderstanding of the nature of financial risk in all of its manifestations.
There’s are times to be buying CDs, such as a couple years back when PenFed’s 3-years were offering 6.25%. But, today, if you check their offering lists, or those of comparable institutions, the situation is far different, due to the Fed’s manipulations of the yield-curve and the flood of dumb money seeking “safety”. Well, guess what? There’s nothing safe about buying something like a 5-year CD offering 2.25% when officially reported inflation is running higher, and most people’s experience of it is probably twice that, and that’s even before taxes have been paid on the tiny bit of interest gained.
For sure, not every penny of one’s portfolio has to make money. For the portion set aside as an emergency fund, e.g. the recommended 3-6 months of living expenses, things like safety and liquidity are far more important than avoiding negative returns. Where problems arise is when people attempt to apply a savings strategy to money they should be committing to investing, using the argument, “I can’t stand to lose money”. Well, guess what? Inflation never takes a day off, and parked money is becoming less each day. So a loss is being suffered anyway.
In his book, The Nature of Risk, Justin Mamis draws on an example from tennis to make the point. “If you’re afraid to lose, you’re afraid to win.” There is nothing nice, affectionate, or supportive about investing. It’s a dog-eat-dog contest between you and a counter-party. One of you will be right about the bet that is being made. One of you will be wrong, and the middle man will take his cut in either case. Investing is a less-than-zero sum game is which, if payoffs are equally-sized, you have to be right more often than not, or in which, if payoffs vary in size, you’ve got to be right about the big stuff. There isn’t any room for misunderstandings about how markets work or about how reward relates to risk. For a person committed to Voluntary Simplicity, the situation is even worse. They’ve got to make more effective use of the likely limited amount of money available to them than others.
I like what is at the heart of Joe and Vikki’s book a lot. “Life is precious. Resources, energies and time are limited. So, figure out what is worthwhile doing and pursue it.” But connected to those lofty goals is the nitty-grity of providing the means. I truly abhor the fact that this country has done the financial equivalent of thrown the average worker under the bus by converting from DB retirement plans to DC ones. Now, the proles don’t just have to work “40 for the man”, they’ve had a second job dumped into their laps, that of managing investments, so they can one day retire. Most people have no business being involved with anything to do with investing. It’s not a matter of not having the needed smarts, or even the time. It’s simply a matter of not having the passion for the game that achieving excellent requires when you are competing with the world’s brightest and most ruthless people there are, your counter-party to every trade, every investment you make.
That’s exactly why I offered the advice I did. I said: Park a chunk of that money, because emotions are very real things that cannot be denied. But take a chunk of it and be prepared to lose every penny of it learning how to invest. A smart person would think that very strange advice at first, but he/she would see the point I was making. Investing is a skill, and like any skill, there’s a learning curve to be suffered in which mistakes are going be made. The trick to learning isn’t to avoid the losses, each of which is a learning opportunity, but to keep the losses small enough so that the learning can last long enough that the needed lessons really are learned. Most people are more concerned about protecting fragile egos than learning a skill they wish they had but won’t do the work to acquire, which is exactly what Wall Street wants. They want a dumb investing public whom they can fleece, again and again and again, with CDs or other structured products that benefit their sellers more than their buyers.
Yeah, I am good at what I do. But it took me nearly thirty years of study and effort, and a ton of mistakes no one should have to repeat, to get me where I am today with my portfolio. Regularly, I put 15-20 hours a week on this investing stuff. I didn’t retire. I merely changed jobs, which isn’t to say that anyone else has to put in those kinds of hours. I have friends who do but, like me, they love the game for its own sake. But four hours a week, or a tithing of one’s time, is probably the bare minimum needed if one intends to manage one’s own money, no matter how small the account.
Charlie
Yes. I could have used the “love sandwich” approach and said something like the following.
(1) Everyone is entitled to their own opinion.
(2) What an unnamed individual is proposing to do with her money will likely cause her harm.
(3) “Nice shoes”.
But stupid financial behavior is just that, stupid financial behavior. I could care less if she harms herself. But, also, it doesn’t benefit me to not try to stop it, especially when her fear-driven choice was the direct product of financial ignorance, namely, the very common misunderstanding of the nature of financial risk in all of its manifestations.
There’s are times to be buying CDs, such as a couple years back when PenFed’s 3-years were offering 6.25%. But, today, if you check their offering lists, or those of comparable institutions, the situation is far different, due to the Fed’s manipulations of the yield-curve and the flood of dumb money seeking “safety”. Well, guess what? There’s nothing safe about buying something like a 5-year CD offering 2.25% when officially reported inflation is running higher, and most people’s experience of it is probably twice that, and that’s even before taxes have been paid on the tiny bit of interest gained.
For sure, not every penny of one’s portfolio has to make money. For the portion set aside as an emergency fund, e.g. the recommended 3-6 months of living expenses, things like safety and liquidity are far more important than avoiding negative returns. Where problems arise is when people attempt to apply a savings strategy to money they should be committing to investing, using the argument, “I can’t stand to lose money”. Well, guess what? Inflation never takes a day off, and parked money is becoming less each day. So a loss is being suffered anyway.
In his book, The Nature of Risk, Justin Mamis draws on an example from tennis to make the point. “If you’re afraid to lose, you’re afraid to win.” There is nothing nice, affectionate, or supportive about investing. It’s a dog-eat-dog contest between you and a counter-party. One of you will be right about the bet that is being made. One of you will be wrong, and the middle man will take his cut in either case. Investing is a less-than-zero sum game is which, if payoffs are equally-sized, you have to be right more often than not, or in which, if payoffs vary in size, you’ve got to be right about the big stuff. There isn’t any room for misunderstandings about how markets work or about how reward relates to risk. For a person committed to Voluntary Simplicity, the situation is even worse. They’ve got to make more effective use of the likely limited amount of money available to them than others.
I like what is at the heart of Joe and Vikki’s book a lot. “Life is precious. Resources, energies and time are limited. So, figure out what is worthwhile doing and pursue it.” But connected to those lofty goals is the nitty-grity of providing the means. I truly abhor the fact that this country has done the financial equivalent of thrown the average worker under the bus by converting from DB retirement plans to DC ones. Now, the proles don’t just have to work “40 for the man”, they’ve had a second job dumped into their laps, that of managing investments, so they can one day retire. Most people have no business being involved with anything to do with investing. It’s not a matter of not having the needed smarts, or even the time. It’s simply a matter of not having the passion for the game that achieving excellent requires when you are competing with the world’s brightest and most ruthless people there are, your counter-party to every trade, every investment you make.
That’s exactly why I offered the advice I did. I said: Park a chunk of that money, because emotions are very real things that cannot be denied. But take a chunk of it and be prepared to lose every penny of it learning how to invest. A smart person would think that very strange advice at first, but he/she would see the point I was making. Investing is a skill, and like any skill, there’s a learning curve to be suffered in which mistakes are going be made. The trick to learning isn’t to avoid the losses, each of which is a learning opportunity, but to keep the losses small enough so that the learning can last long enough that the needed lessons really are learned. Most people are more concerned about protecting fragile egos than learning a skill they wish they had but won’t do the work to acquire, which is exactly what Wall Street wants. They want a dumb investing public whom they can fleece, again and again and again, with CDs or other structured products that benefit their sellers more than their buyers.
Yeah, I am good at what I do. But it took me nearly thirty years of study and effort, and a ton of mistakes no one should have to repeat, to get me where I am today with my portfolio. Regularly, I put 15-20 hours a week on this investing stuff. I didn’t retire. I merely changed jobs, which isn’t to say that anyone else has to put in those kinds of hours. I have friends who do but, like me, they love the game for its own sake. But four hours a week, or a tithing of one’s time, is probably the bare minimum needed if one intends to manage one’s own money, no matter how small the account.
Charlie