WALK ON WATER, ANYONE?
May 30th 2008 01:00
"Walking on water
Keep your head above water
We shall avoid the terms: probability, variance and covariance, correlation, coefficient, standard deviation, etc. as much as possible. But we will look at Markowitz modern portfolio (theory) and see what we can find there. Never mind that his “modern portfolio” was theorized (conceived, in the 50’s) even before many of us were...well, conceived.
To quote his theory; “Market Portfolio is the portfolio that includes all risky assets, not only local common stocks but includes non-local stocks, bonds, options, real estate, coins, stamps, art, or antiques…”
I am a newbie, and I cannot afford an extensive portfolio like that (which in my mind would require my own minting plant to acquire) so, I’ll just pick up a thing or two. I’ll go for the bonds and maybe some real estate (then I’ll turn a bit religious in my own private thoughts and pray that they keep me from drowning).
Stocks and bonds move in opposite directions and that is why I am taking bonds during economic down turns. That is not to say that I will not take bonds when my stocks are earning. If I can afford both, I will buy both, anytime, but with a heavier weight on what is favored by current economic trends.
Let me try to pare some more “Greek” words from that statement. Of those two investment instruments, stocks beat bonds by a mile when economic conditions are good. So when everyone is singing praises about “how wonderful our economy is”, I will try to position with more stocks. When the economy sucks, I will dump the stocks in favor of bonds. But there is a nice way of doing this and it is not as simple as it sounds (you have to know how and when to dump the stocks and when and how to buy the bonds).
Moving on…
As already stated, you go for stocks in good economic conditions because it gives you more earnings compared to bonds. Your bonds are also giving you a profit during good times but it pales in comparison with what stocks can deliver.
Flying high
In the office, we do believe that any percentage of zero (0) is – Zero! Now, our office do not deal with numbers (it is something that almost everybody tries to avoid there - like plague) so chances are that we are wrong. But no matter how we try, we cannot get a number higher than zero by extracting any percentage from zero. It is always zilch!
In bad times, when zip is all the profit you get from your stock market investments, those anemic percentiles that bond issuers brag about during good times don’t look that bland at all. In fact, that’s where many scared people go to every time the road to stock market heaven starts to get bumpy.
If you are able keep your eyes and your ears open during market downturns, and your senses (and innards) are not paralyzed by fear, or you are not too busy panicking, you’ll notice that bond prices are climbing uphill while stock prices are sliding downhill.
Riding the tide
And to be able to keep your head above water in times of crisis, read about bonds. Learn how to make a good yield.
Among the things that you need to know is why, unlike stocks, you make less money from bonds when its prices go up and earn more when its prices go down.
It might likewise be nice to know why some of those bonds that claim to give you higher yields are the ones that might not give you anything at all, and may even take your capital away.
Down the drain
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Thanks. Enjoying your company.