Saturday, November 5, 2011

Crazy Market and Appetite for Risk

I bought a little bit of silver about a week back. I was happy that spot was down a buck, since then spot is down another 9 dollars. I sure bet right on that one. It is probably a nice “dip” if you didn’t blow your wad a week ago like I did. Stocks are down significantly as well. I think it is pretty apparent that Europe is nowhere near done with its fiscal troubles and a Greek default is getting more and more likely.
I don’t know what will happen but we are probably in for a wild ride.

Interestingly I bought stocks awhile back. I do not regret that decision. On the long timeline I am looking at stocks are probably (more so in certain areas) a bargain. However in the short run I do not have a clue what is going to happen. Interestingly a co worker recently bought a bunch of stock on credit in the last couple of days. He figured they will bounce back and he will make some easy money. I wish the guy the best.
That got me to thinking about appetite for risk. There is of course a definite relationship between risk and reward or more accurately put potential for rewards. Also leverage (which we normal people call debt) lets you theoretically raise profits and when it works well it works very well indeed. However when it works badly things come crashing down like a house of cards. Instead of your plan going to heck, your plan goes to heck and now you have to service this debt.

I hesitate to say what is right or wrong for anybody. It depends almost entirely on what you are comfortable with.  I’ve heard it said that if something will leave you up worrying at night you should not put money into it and that makes sense. There is definitely a human component there. I have some appetite for risk as I invest in stocks and relatively more risky areas like energy and in developing markets. However I do it with cash, cash that while it would not be ideal I can afford to lose. Worst case if I take a big hit (especially now while we are relatively young) we call it an expensive lesson and move on.  Personally for me it is about a specific pool of money for a specific thing.  Also since we have some of our bases covered by putting some money away for emergencies and not having debt we have more options and can afford to put money toward something with an element of risk. The money we need to feed ourselves if my income is disrupted is not sitting in some stock that might be wildly down (or up) at any given time.

4 comments:

Carteach0 said...

Sensible.

Chris said...

I figure when it comes to investing, all I can control is my asset allocation, my tax planning, and my expense ratio.

So I have a sensible AA, minimize my tax burden (legally), and use Vanguard and other companies with extremely low expense ratios. Like you, my time horizon is long so I am willing to accept volatility.

While I am happy that I have made some money dabbling in individual stocks and PM's, I see the former as entertainment (and budget accordingly) and the latter as insurance or a hedge.

I am generally not a fan of investing on margin, but if you can get a great interest rate it isn't a terrible idea. For example, I have had a loan at 2% (yes, two) for a few years that I've been happy to carry. I'd prefer to roll extra money into my retirement savings or long term investments than to pay down a loan at that interest rate!

Chief Instructor said...

Borrowing for investments has always made me nervous. Buying stocks or PMs on margin is gambling, IMO. No thanks. I'll do that in Vegas, thank you very much! I totally divested my stock holdings in 2007, and have slept very soundly ever since.

Right now, I'm basically doing the old "income averaging" by buying a set dollar amount of PMs each month. The stock market makes me too nervous right now - too much of the "earnings" are a result of cost cutting, not increased sales. This can work for a while, but not forever.

Gold and silver have never been worth zero, so even if it all collapses, I'll still have some of my capital available. Kind of sucks as an "investment" strategy, but it's the best I've got right now.

Ryan said...

@ Chris, Seems like a solid plan. Personally I just don't like debt.

@ Chief, You and me both brother. I always figure if I lose my shirt at least it is my shirt. I am not shirtless and OWING somebody a shirt. As for stocks I am still in but am significantly younger than you are which makes my timeline very different. I do some of that averaging and try to get my PM's during at least small dips. As investments PM's scare me right now, seems like one might be buying towards the top. However as insurance I find them very comforting to own.

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