Over the long term, the survival of the entire global economy almost certainly depends on the continued profitability of the companies which provide the world’s goods and services. Without that, the tax base on which governments rely virtually disappears, lenders to those businesses don’t get repaid, and even that hedge against global disaster, gold, won’t Read more »
Lesson 17 – What Insurance Is and Isn’t
Did you ever hear the story of the man who thought he had enough life insurance but died anyway? Apparently he didn’t quite understand the concept, and neither do most people. I’ve seen people insure packages worth $100 at the post office while not having any disability income protection. This is nuts! The purpose of Read more »
Lesson 16 – Fool’s Gold
If you’ve ever Googled my name, you undoubtedly know that I’m a libertarian. In fact, way back in 1982, I was the Libertarian Party nominee for California treasurer. I didn’t win, but I got an extremely high percentage of the vote in all marijuana-growing districts (which is rather odd since I may be the only Read more »
Lesson 15 – How to Slowly and Safely Go Broke
Everybody knows that stocks are risky. Everybody is right. Even a typical globally diversified stock portfolio, the S & P Global 100 Index ETF, lost 56% of its value between that Halloween date in 2007 that I mentioned in the last lesson and March 9, 2009, which by a strange coincidence is National Panic Day. (I’m Read more »
Lesson 14 – The Joys of Bondage
Look, I get it. If you’d put all of your money into long-term Treasury bonds just before interest rates began the longest and steepest decline in U.S. history, you would have done really, really well. And if you had sold all of your stocks on Halloween in 2007 and put all of the money into Read more »
Lesson 13 – Stocks for the Long Run
Obviously, you cannot buy everything. Where would you put it? Also, not everything’s for sale. We need to limit our discussion, at least initially, to investments that are easy for the average person to make. We’ll begin with stocks. I can’t predict the future. I can, however, do a reasonable job of predicting the past. Read more »
Lesson 12 – Why Bill Gates Isn’t a Million Times Happier than You Are
Wealth has a diminishing marginal utility. This, in my view, is the most important argument, the one I stress with my clients when helping them plan their future. Even if the first two reasons (here and here) didn’t apply, an investment strategy designed to serve real lives mustn’t overlook this one: $2 is not twice Read more »
Lesson 11 – Your Life Is Only One Experiment
To be fair, I must note that a few theorists have offered a plausible case against reversion based on chaos theory, arguing that “off-the-chart” results occur in real life that normal statistics claim are impossible. (For instance, based on the calculated daily volatility of stocks, there is simply no way the U.S. stock market could Read more »
Lesson 10 – The Market Is Not a Pure Coin Flip
In the previous lesson, I promised to provide three reasons to use the median (which improves with diversification) instead of the mean (which does not). I’ll start with my weakest argument, although it is one shared by many academics in the field of finance: Equity returns revert toward long-run averages. The book that first popularized Read more »
Lesson 9 – The Average Meaning of Average
In the last lesson on Modern Portfolio Theory, I used an example involving coin flips that showed the results of a normal outcome of heads and tails for one coin and then for two coins in order to show the surprising benefits of diversification (lower risk combined with higher returns). More than one reader (but Read more »