Agoraphobia

crispydoc Uncategorized 8 Comments

Deep thoughts from our recent travel:

Agora = Greek for marketplace

Phobia = Greek for fear

A close friend from childhood works in finance and earned his MBA but keeps the vast majority of his savings in CDs and treasuries that barely keep up with inflation.

His wife saw her parents lose a significant portion of their net worth (either in the crash of 2000 or 2008), and as a result has developed a firsthand knowledge of the down side of equity investing.

Consequently, my friend’s plan is to pursue a one percent level of income (he’s on his way to doing so, slowly but successfully) at a high level in finance in order to reach his retirement goals. It’s a tough road, but if anyone can pull it off, he will.

Rather than a fear of open spaces, as defined by the latest Diagnostic and Statistical Manual, perhaps agoraphobia would be better defined as fear of the market?

Comments 8

  1. It is interesting that a lot of your investing basis is formed with what the market was doing when you first discovered finance. With the huge run in equities we have had since 2010, are we going to be creating some hyper-risky investors who feel they can’t lose? On the other end of the spectrum, like your friend, those that had firsthand experience of major financial bubbles may turn out to be too conservative.

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      Author

      Xrayvsn,

      I suspect present conditions will lead to a bumper crop of Dunning-Kruger investors, folks who attribute the earnings of bull market to their personal skill, lack the insight to understand their own limits, and assume excess risk in future investments as a result. In fact, your reply has inspired my post for next Monday! Just like Generation gen X, we may someday reckon with bailing out the investing mistakes of gen DK…

      I’m going to let that one simmer.

      Thanks as always for your insightful observations,

      CD

  2. True Greek tragedy. Being in the market is true sleight of hand. If the market went down in 2008 did you truly loose anything if you held on? If you put money in SPY in Oct 2007 and held on, in Apr 2013 you were even. 5 years later you’re 68% ahead. If it fell 68% you’d be even again. The real magic trick is to keep on buying those shares. If you bought shares over the past 5 years and it fell 68% you’d be ahead because you would own those new shares. You would just have to wait a little for it to go back up. This is why the re-balance is so important. If forces you to sell some shares high, put that in the bond bank in up markets (sell high), then take some out of the bond bank and buy more shares when the market is down (buy low). Free money.

    I won’t criticize your friend but in the inflation of my med school years (early 80’s) my Grandpa was in CD’s and bonds. That represented a true loss because those dollars he didn’t make never reappeared. We inflated but never equally deflated. A hamburger (or house) went up in price and never really came down to the same extent. Remember when a McDonald’s burger was 20 cents? Same is true for savers in the last decade. So what’s the real risk? 1% with hidden principal erosion (inflation), or purchasing a piece of the private enterprise money making machine known as USA? As long as you and your neighbor get out of bed every morning to go add value to those shares, there is nothing to fear. That’s true Greek Comity. Color me Agoraphilic.

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      Author

      I think you are onto something – the concept is whether you fell more falsely reassured by risk this is explicit (market risk with equities) or implicit (risk of the stash under your mattress falling behind inflation).

      I completely understand folks who got tossed from the bronco and are fearful of getting back in the saddle. Problem is, they either underestimate (or fail to fully grasp) the risk of forever standing at the edge of the corral.

      My friend is one of the few guys I know who stands a good chance of making it into the highest earning bracket in finance such that he’ll be okay in the end, but it’s earning and saving without investing forms a pretty lopsided foundation for your future.

  3. Very cool CD. Can’t say I have ever been the inspiration for a post before. Lol. Look forward to reading it (be sure to throw some credit my way. Lol)

  4. I believe when anyone sticks like 90+% of their networth in equities and they are not in their twenties, they might be upset when the next market correction appears. There is no need to do that unless you are Warren Buffet’s widow. But she can do that because he is going to leave her with a ginormous amount of money.

    For everyone else, they should simply save more money so that they do not need to take such outsized bets.

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      Dr. MB,

      You speak the truth. There are additional benefits to experiencing a market downturn in your twenties – since most 20-somethings have accumulated little at that point, but can feel the sting of a big paper loss and learn from it early, you get all the upsides of revising your allocation to something you can learn to live with, and the added benefit of a drop that allows you to buy stocks on fire sale.

      Bernstein likes to say that the young should pray for a bear market at the start of their career; I think the lessons learned from early loss are as important as the low buy-in costs.

      Thanks for stopping by, and congrats on your place on the WCI list!

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