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Wednesday, September 1, 2010
I've been raising some pessimistic issues recently to see how people feel about the investment markets and to play the devil's advocate. Periods where negative news comes in waves test investors, especially do-it-yourselfers.
As I make my way around the blogosphere, I must say I am impressed with the number of young people commenting that today's market represents an opportunity. This shows, in my opinion, they have studied their market history.
I recently revisited some sites and decided that it is worth posting my response to an excellent post at Generation X Finance in response to a reader's question of whether he should get out of the market.
In the comment section I wrote:
In November 1972 I was 25 years old. The S&P 500 closed at 115.49 on my birthday. Today it is at 1022.58. In 1972 there were no cell phones, offices weren’t equipped with PCs, families drove station wagons. In 1972 our immediate threat was the Soviet Union. The threat of a nuclear war occupied the country. Viet Nam was raging and young people were viewed as out of control. In 1974 OPEC quadrupled the price of oil overnight and there were gas lines everywhere as gas was rationed. In 1987 the stock market crashed – the market dropped 24% in one day! I saw people quit the investment business that day. They just walked down the hall and turned in their resignations.
Moving into 2000 people predicted widespread computer crashes – planes weren’t supposed to be able to fly and mass transport was expected to break down. Corporate governance was at an all time low as companies manipulated their earnings. In 2001 we had the terrorist attacks. This resulted in two wars for the U.S. Some people predicted that people would never fly again.
Today everyone has cell phones, workers have PCs on their desks, incredible breakthroughs are being made in bio tech, houses are being revamped to be environmentally friendly. The car you drive 5 years from now will be vastly different from the car you are now driving.
Today is different. We live in an information age. Kids now have the capability to solve the energy crisis literally in their garage.
Do you think 35 years from now people will look back and say 2010 was not a good time to invest?
I won’t be around. so I’ll frame it in terms of 25-year-olds. You guys have no idea about what type of products are forthcoming and the companies that will be formed and the advances that will be made. This puts an investor at a disadvantage because he can always see the problems explicitly in front of him, but what can’t be seen are the industries and products that will be formed.
One thing is for sure, though – there will always be an excuse to not invest. If I was 25 years old, I would be in the market big time.
This type of exercise, trying to put the present into perspective, is useful, I think, when markets go down a lot - and even after they have risen to what might seem to be lofty levels.
The idea of what is seen and what is not seen is actually an important concept in economics and is getting some notoriety in behavioral economics. For those not familiar with the concept, you can read the original by Fredic Bastiat at "The Broken Window" , or view the youtube video to get a more modern version.
Posted by Robert Wasilewski at 6:59 AM