Tuesday, May 5, 2009

big time returns... a nice time but not a long time, so have a good time, your stock can't rise everyday.

I've repeated on several occasions that I never keep more than 10% of my own net-worth in the stock market.
I'll just focus on how and why i came to take this attitude and why it's made me enjoy the stock market more even if my exposure is less and to look at equity investments for what they really are (at least through my jaded, hippy-hating eyes).

This view probably started out as an asset mix of around 20% (think pareto's principal- which i don't follow anymore), and from 2005-2008, became more and more conservative. It was mostly because i simply dislike extreme volatility in any aspect of my life where it's not absolutely necessary. Over the past decade the stock market had been booming, but it had also been busting and booming back at a very high rate. I disliked the constant boom and bust so much that i decided to get out of the market. The final sale i made was BMO. I purchased shares at about $62 in July 2006 and sold them in February of 2008 at $57.

at the time i felt like i was taking a beating but just happy to get out.
Everything in my portfolio for the remainder of 2008 was in bonds and GICs (luckily, i was able to buy 1 year GICs, cashable after 30 days, that yield 2.8-3%) Current GIC yields of similar duration are about 0%... I also kept a very small position in a major energy company.

So while i hated the market for what i perceived as volatility. The crashing housing prices in California and Florida and Arizona were in the news, and i was thinking maybe it's time to take the cash and just buy a nice vacation home, and finally be finished with Canadian winters.

I never put two and two together and luckily never bought any property (i had never been offered Mortgage backed-securities or asset-backed commercial paper) and i was just as surprised when the meltdown of October-March crippled the global economy.

That being said, i was also lucky enough to be doing a great deal of reading into macro economics, personal finance and DIY investing at this time. (i was so put off by the stock market, i was wondering if there was any other decent alternative to my bonds- which were earning quite nicely through it all..... the answer btw, so far, is NO).

When i finally rounded out my general investment knowledge by looking at the recent works by Nial Ferguson in "the Ascent of Money" and doing some further background that included Nasim Nicholas Taleb, author of "the Black Swan" among other books on chance and investing, i decided this blog was the next step.

This blog represents my conclusion that the whole notion of diversifying an equity portfolio, that you should balance 50% stocks and 50% bonds or anything similar to this, is a myth.

This blog is my attempt to verify or discredit the belief that the most efficient and safest way for your investments to not go down in value, beat inflation, earn a steady return and provide a fully customizable portfolio for your specific needs is.... BONDS (specifically investment grade corporate, provinical and even real-return government of canada bonds).

If you pay any advisor 1% or more of your capital every year just to manage your money, it is a myth that you need to pay that much just to preserve capital and create growth.

I started this blog with the idea that putting anything more than 10% of your assets in an allocation that does not promise to protect your capital is too risky- investing is about assumptions of what will happen in the future and these assumptions always contain risks we ignore or are unaware of and that is why people lose money when they don't have to.

Im happy that the rebound of march- april has restored an average of 25% people's retirement savings (for those that stayed invested). There are a lot of people who lost over 50% and have little to no chance of ever recovering from the peak, but this is why we call the market volatile and why i'm too scared to put a 1/4 of my money into that arena.

when i do put money in the stock market, i realize it's to my advantage to take more risk. I'm already prepared to take a loss so i want to take the most speculative risks. Do all those crazy trader strategies- buy the companies people are terrified of, buy the companies you like that no one has ever heard of and hedge like a mad man. That's the nature of speculation and it's the form of venture capitalism the stock market provides. If you are prepared for the downside of an unprofitable company, but you like their product and you personally believe in it (like some eco-small-cap-companies, or bio-tech, or whatever) you should enjoy the role of capitalist and your economic vote to increase the resources of whatever belief you attach to your preferred company. your money could, obviously evaporate completely, but when you take only 1% of your net worth and throw it away at a cause (which you had hoped would be profitable) you can also consider it a form of charity and the government does allow a tax credit for the loss if it all goes horribly wrong.

frankly, looking at the corruption and admitted failure to make any meaningful long-term progress from some large and established charities, i think the argument can be made that (specific, highly-speculative) investing in the stock market is an equally charitable form of donation.

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