We’re living in strange times for investors.
People normally dump stocks when they go down, but lately they’ve been dumping them even as stocks have performed well. As for bonds, we usually think of them as a safer investment that can be used to reduce risk in a portfolio, but some are warning that bonds carry unusual risks in today’s conditions. (more…)
Investors often encounter the terms value stock and growth stock. Perhaps you participate in a 401k that offers mutual funds that invest in one type of stock or the other. The terms may seem confusing. How can a stock be a good value unless it produces growth? (more…)
It’s been called the cruel math of investing, and sometimes used to justify a more conservative approach. Whenever your account loses a percentage of its value, it has to go up by a greater percentage to put you back where you started. For example, a $40,000 account would drop to $30,000 in a 25% loss; getting it back to $40,000 requires growth of 33%. If your account drops by 50% you need to grow it by 100% to recover. Yet there’s a reason this math isn’t cruel at all, and shouldn’t affect your judgment about how much risk to take with your investments. (more…)
Not much in the way of hard news this week, but that gave us an opportunity to add other material you may find interesting or useful. (more…)
Suppose you’re offered a choice of two investments. We can’t predict how either one will perform, but based on their characteristics the performance we would expect on average from the two investments is the same, but one carries a greater likelihood of truly superior performance. Which would you choose?
When you understand investment risk well enough to respond confidently with the correct answer to this question, you’re far ahead of the typical investor. (more…)
The second quarter has come to a close with the stock market roughly 10% below the highest levels reached in April. With apologies to retirees living off their investments, the rest of us can celebrate. We’re going to benefit from the decline. At least, we will if we keep our heads. (more…)
Many books on investing explain the rule of 72, which makes it easy to estimate how long it takes for an investment to double at a given rate of growth. In most of these books it’s presented as a bit of trivia or at best a handy math trick. In That Thing Rich People Do I show how it can be used to gain insight into key aspects of investing, including the benefits of getting started early and the importance of minimizing expenses. (more…)
Jesse Michelsen, a young computer technician (and husband and father) blogs about money at a fine website called Personal Finance Firewall. He was kind enough to review our new book, That Thing Rich People Do, and he’s giving away a copy to an individual randomly selected from among those who respond to his request for comments on retirement planning at the end of the review. Take a look and you may win a free copy of our book while introducing yourself to an interesting blog.
Imagine an alternate reality where after the Titanic hit the iceberg the passengers stripped the captain of his powers and put someone else in charge. He brought in a new crew and they worked like mad and somehow prevented the ship from sinking. They even got the engines going and the ship heading in the right direction. As it became apparent that they were no longer in danger, passengers quickly forgot about their recent peril and gave the new captain no credit for saving the ship. Instead, egged on by members of the previous crew, they complained that their luggage was wet and the ship was behind schedule. This is the position in which President Obama now finds himself.
A recent poll found only 32% believed the country is headed in the right direction, and nearly twice as many said it was “on the wrong track.” Those numbers are far worse than when the same question was asked a year earlier. As investors we need to understand that this is a political phenomenon, and not a reflection of what is happening in the economy. (more…)
Why can’t people do a better job predicting the stock market? It isn’t just ordinary folks like you and me that have problems. Even the experts get it wrong about as often as they get it right. How hard can this be?
It turns out to be very hard. We don’t have a reliable way to predict stock prices — and we never will. The reason can be found in something I call the prediction paradox. (more…)
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