Efficient Markets, Black–Scholes equations, computer models that don't take into account fear, when will it all end? For how smart we are how can we be so stupid and short sighted? We say that we want to invest for the long-term yet we push the sell button when a company posts a one-quarter loss (thats not even 1/120th of the length of a 30 year retirement fund). Reading a recent blog post by Tim Ferriss he said "
Most advice and decisions center on one question: what is your risk tolerance?
I had one wealth manager ask me this, and I answered honestly: "I have no idea." It threw him off. I then asked him for the average of his clients' responses. The answer:
"Most answer that they would not panic, down up to 20% in one quarter."
My follow-up question was: when do most panic and start selling low? His answer:
"When they're down 5% in one quarter."
Unless you've lost 20% in a quarter, it's hard—neigh, impossible—to predict your response. It's not to dissimilar from a common boxing maxim: everyone has a plan until they get punched in the face"
When will we, as investors, realize this? Why do we want to push for individualized retirement plans? People are not smart enough to work forty hours a week at their day time job and expect to come home and beat the market and money managers who work 80 hours a week researching and analyzing the market. There is no informational advantage that would enable you to do better than someone else. Stocks serve a purpose and they should be used in a diversified portfolio but if you expect a lifetime of dot com bubble stock runs and 1400 on the DOW than you are not very smart. Everyone is wondering when the market will bottom out; it will bottom out and will go on a dramatic upswing in 5 years. My prediction is that in 2014 you will start to see the market appreciation of "yesteryear." Why? Because we are short sighted, in five years my generation will have graduated and started to make money. With the lowest stock market in the last ten years you bet your ass we are buying in. Also in five years many people; current Juniors, Sophomores, and Freshman in college will have graduated and started to make money, will want to get into the market, and there will be a fresh influx of capital. This capital along with the fact that the market is going to bottom and level out in the next year to 18 months will enable the stock market to be primed for growth. The kicker is that we have to be aware of the psychology of markets. We shouldn't let our heads swell with great wealth and we shouldn't scream fire in a crowded room, (quietly and quickly get to the exit before the other idiot shouts fire). My generation needs to keep in mind the mortgage crisis, the dot com bubble, the early nineties, the late eighties as well as the late seventies - all of these set backs occured because people were too overzealous when the money got loose, did not protect their positions and waited for stocks to go to the moon… change your thinking and invest in what you know.
