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Wednesday, October 01, 2008

Get Rich Slow

With the recent market collapse, I've been literally getting questions and queries from all over the world about what I'm doing, and what's going on.

I've been relatively sanguine about the whole affair --- not just because I'm in Munich, so I'm quite far away from all the noise. First of all, what's happening is a purely financial matter --- if all the banks went away tomorrow, companies will still get things done. Corporations still run relatively little debt, and a little bit of history will tell you that what we have here isn't even as bad as the 1987 stock market drop. The probability of another Great Depression is quite slight. I'd be much more worried if there was another world war

A review of the sample asset allocation spreadsheet I put together in late July shows a 7% drop. (This over-states the losses, since it ignores dividends and interest, but you get the point) While that wouldn't make you a happy camper, it is certainly not something to panic about. In fact, if you invest for long enough, you will have a year with a 30% drop eventually. You just don't know when. It might be this year, but it might come the day before you retire. That's why financial planning is a multi-decade process, and month-by-month posts and portfolio watching is likely to be counter-productive.

I just observed that one of my watched financial blogs pfblog has stopped updating his monthly portfolio reports since July. This is how survivorship bias works --- at this moment anyone who's been successful will be bragging about his results, while failures like pfblog keep quiet. This is why active investing will never go away --- there's too much in human nature flogging it, while passive investing would be very much like a spam e-mail message telling you about how to Get Rich Slow.


md said...

companies will still get things done. Corporations still run relatively little debt

Does that mean you are against the bailout? I've been led to believe that small and midsize businesses rely on bank loans to survive. Supposedly without the bailout, these small businesses will drop like flies.

Piaw Na said...

I am against the bailout the way it is done. If the taxpayer is footing the bill, I want the taxpayer to have equity in the banks. The way it is done right now is a giveaway to the crooks who've been ripping the system off for years.