No matter what stage of life you’re in, the following article offers a great summary of what your financial priorities should be throughout your life.
Is Your Career More Like a Stock Or a Bond?
A recent article argues that investors in steady jobs (government, teachers, etc) should balance out their steady & predictable “bond-like” pay check by buying more stocks in their retirement accounts, while investors in risky jobs (entrepreneurs, sales, etc.) should load up on more stable investments like bonds to lower their overall risk.
Maybe on paper this concept seems like a good idea. If an investor could check emotion at the door, maybe a concept like this could work. But it fails to incorporate the investors goals and risk tolerance. And investors can’t check emotion at the door. Most investors keep salary and investment performance in separate buckets.
The only time we’ve used this approach is to developing income distribution strategies for retirees with part-time jobs, second careers, or owning a small business.
I’m interested in your thoughts? Do you like the concept? Send me your thoughts and I will post them.
Are We In an Investment Bubble?
Over the past few months, many experts have been trying to make sense of the performance of the US stock market. It has been on a roll for about two years now! Is it too good to be true? Are we in the midst of an investment bubble? Economists are debating the issue now, as it’s hard to identify one during the moment.
It’s hard to find information that can help you make up your mind. Either, it’s an overs implication of the facts, an exaggerated piece written by someone looking to scare the reader, or so academic that you can’t fully understand the article. Below are a two pieces that I’ve found to be helpful.
The chart below suggests that we are (and have been for quite some time) outperforming the long term average of the market. There is always a reversion to the mean. It may happen in 20 years or tomorrow. I like this chart because it puts the past few years in context.
Robert Shiller, Nobel Memorial Prize recipient in Economic Science and author of Irrational Exuberance, outlines six points that can contribute to a bubble:
- The sharp increase in the price of an asset or share class
- Great public excitement about these price increases
- An accompanying media frenzy
- Growing interest in the class among the general public
- ‘New Era’ theories justifying the high price
- A decline in lending standards
Some of these conditions appear to have been met, but many have not. Lending is still has high standards and much of the general public has not participated in the market. They are still cautious.
I think many people are confusing an economic bubble with a normal market correction. Will we experience a 5%-10% market correction in the near future? Most likely. Will the bubble burst bringing us back to the lows of 2009? Probably not, but you can never tell.
This serves as a reminder to keep to your investment strategy. It’s all too easy to make an emotional decision and jump on the band wagon as the headlines tout new highs. But that’s where people can get in trouble. They load up in one asset class at the wrong time.
A Brief History of Bubbles
Excerpt from Faber’s “Learning to Love Investment Bubbles: What if Sir Isasc Newton Had Been a Trendfollower”
“From a behavioral and psychological standpoint [a trend following investment strategy] is often the most difficult to deploy when it is most useful. Strong discipline would have been required to sell technology stocks in 2000, REITs in 2007, or South Sea stock in 1720, especially when one’s colleagues, friends and neighbors were making money hand over fist. In the end, for those who imposed such discipline, it was the prudent choice.”
Seems relevant for what we’re seeing in today’s recovery.
If you want to read more about how trend following works during investment bubbles, read this paper (especially the summary at the end):
Have you shopped at Target lately?
Target announced today (article) that it was the victim of what may prove to be the largest data theft ever recorded. If you shopped at a Target in the last few weeks, your personal credit card or debit card (not just the Target-branded cards) may have been one of more than 40 million credit cards that were compromised. 40 million is also the population of California!
If you suspect you’re in that unfortunate group, you can check to see if there is any unusual activity on your account by going on line or calling customer service for your credit card. You can protest any fraudulent charges, and the credit card company will probably waive the charges after a brief investigation. Keep monitoring your account for the next month or so. If you’re suspicious and want to be extra cautious, ask your credit card company to freeze your account, and ask for a new card.
Identity theft has now affected one in 14 Americans, and losses from identity theft exceeded $47 billion in the last year, far more than all other property crimes combined.
Have you ever been affected? Send us an email with your story and we can post your experience, confidentially of course.
The Mississippi Bubble: One of the First Bubbles
There’s a lot of talk about if the US market is in a bubble these days. It’s next to impossible to determine if we are, in fact, in a bubble. But the media will do just about anything to produce a story that will get more people to read their publications.
Instead of reading their predictions, consider watching this video about one of the first economic bubbles ever recorded.
John Law and the Mississippi Bubble by Richard Condie, National Film Board of Canada