Where Personal and Professional Life Collide...

Excuse me if I neglect to panic over a roughly 3.2% change in the Dow Jones Industrial Average...

Everyone's focusing on "400 points! It was down more than 500 at one part of the day!" and not looking at proportionality...

I make numbers dance the way you make words dance, and I'm used to looking at percentage of a total as a measure of how concerned I should be about a deviation. 10% change in one day? There better be a good reason. 3% change? That's just noise in the system...

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lagilman

Never said anyone should panic. However, on behalf of people who just saw a significant paper loss that may or may not come back -- that was a remarkably cold comment to make.

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Certainly warmer than expressing regret that a suicide bomber didn't kill Vice President Cheney...

Hey, I saw a paper loss today, too. If I had just submitted retirement papers, it might've caused me to do some recalculation and rebalancing. Since I'm a good 30 years from that, however... I'll just keep things where they are, maybe make a few strategic buys, and not wish anyone dead.

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lagilman

Certainly warmer than expressing regret that a suicide bomber didn't kill Vice President Cheney...

Fair call, if not quite equiable (I was being politically pointy and more than a little ironic)

Going back to your original comment -- not only did I not say anything about panic, there has been no mention anywhere of any panic from the sudden drop. So I'm wondering why you brought it up? Was there a commentary there I missed?

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Regarding the "excuse me if I neglect to panic" bit, around the same time I first encountered your post, I had just come from a couple of news sites (CNN, ABCNews) where their tone was decidedly straight out of the Chicken Little playbook. Shortly thereafter was my trip home from work: Newsradio with same tone. Evening news: same tone.

So it was a reaction to other sources, really, not your original post. Apologies for the misunderstanding.

ABC World News Tonight put the raw amount up in big, bold numbers, and in Flyspeck Diminutive 3pt, almost off the right edge of the screen, the percentage change.

No sense of proportionality whatsoever. And hey, I know the reason: panic brings ratings. Rationality doesn't.

Given the number of largely random-acting variables (literally including the behavior of certifiably insane people in various parts of the world) that impact the market, it's a source of near-endless amusement to me that the market *doesn't* fluctuate 3-5 percent on a daily basis. That's the kind of ambient noise level I would expect in such a system.

Regarding the Cheney situation: Same news sources were wondering how the Taliban would know he was there... umm, oh, I don't know, maybe they looked at ABCNews.com and/or CNN.com or just turned on the telly? ABC reported yesterday evening US time on the nightly newscast that Cheney was there. I'm sure the families of the soldier killed and those injured by this suicide bomber are real happy the press has the freedom to provide operational intel to the enemy.

(No, I'm not advocating restrictions on the press. I'm advocating that the press show some responsibility.)

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lagilman

No sense of proportionality whatsoever. And hey, I know the reason: panic brings ratings. Rationality doesn't.

Interestingly enough, the news I was just watching (CBS, for the record) they made a point of comparing this to Black Monday, and downplayed the loss. Of course, since I'm one of those with paper losses, I'm cranky as hell about it, no matter how relatively minor it might be historically. I'm also cranky that I'm not in a position to do any buying right now.

Right now, the big news seems to be the fact that Anna Nicole Smith's body is decaying and still-unburied. Playboy Zombie!

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That anon was from me, by the way, so you can just kill it.

What I said was:

Time for Britney to do something else kooky and knock Anna Nicole's mouldering corpse off the front pages again...

Just finished checking my index funds. Yep, took a small hit today, but I'm still net-positive Y-T-D, so everything is staying where it is.

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I need to pay medical bills AND buy a car that runs (unlike mine, which will run jhust long enough to make either the dealership or a local high school auto shop.) So no shopping right now.

And I just looked at the portfolio this AM and was pleased at its numbers.

Bah.

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Jim, it's REPORTERS. You need a bozo filter on financial information just as you do on military affairs. Stick to specialized sources. If the LJ owner is amenable, I can provide a few that are pretty good. But the ordinary press, okay, NY TIMES, FINANCIAL TIMES and WSJ are great, but wire services--I don't go beyond Bloomberg and Reuters.

Boards are Motley Fool, SmartMoney.com. I use a bunch of others as well, but they're far more specialized and you don't need them unless you're in those areas.

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Even then, it's the five years before and after OFFICIAL retirement that are the problem. Prudential (IIRC) calls that the "Red Zone" when significant losses will dramatically affect the size of your portfolio when you start needing to withdraw assets.

But even that represents a 10-year range.

It is HARD to think that way, especially when it's your money, but it prevents you from making impulsive decisions. The long view is comforting and enables you to approach this stuff without emotion.

For example, yesterday afternoon, I typed in a few stock symbols, swore, and went back to work.

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rhonawestbrook.livejournal.com

K I know you are a tired person, but you are also a wise writer and I want to ask a writing question.

What do you keep in mind while creating a sympathetic character? Are there any tiny nuggets of wisdom you'd have the time to pass down to a beginner? Is there a list of things you are very very careful not to do?

If you don't like to be pestered about writing here, lemme know and I promise not to do it again :-)

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lagilman

Oh, I'm all about being pestered about the writing. *grin* Let me get some food and rest in me, and I'll make that a new post, 'k?

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rhonawestbrook.livejournal.com

Thank you so much!

:::rubs hands together in glee and hurries off to tell her friends about the up-coming post.:::::

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lagilman

slighty delayed by Work, but it will appear....

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equesgal.livejournal.com

On the news they are saying that The Dow first dropped 200 points in 30 seconds...and that that was a computer glich, which then set off a panic and it plummeted some more. Jeeze...to bad i don't have any money to invest right now.

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lagilman

the news was first triggered by the Chinese market taking a tumble. But once it starts, people pull fast.

And then they go shopping, yeah.

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As I said to M this afternoon "if you were looking to go shopping, today would be the day..."

Yes -- we know who really has cajones on a day like this. Wade in and BUY, dammit.

In other news, Taliban bombers missed their alleged target, Vice President Cheney...

drat

Silly person. We want to impeach him, not kill him. (The scary times are when I worry that he's right about Iran, etc....)

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lagilman

We want to impeach him, not kill him.

Just so long as he is removed before we go after Bush...

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Exactly.

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caryabend.livejournal.com

We want to impeach him, not kill him.

When I needed a good cardiologist, I found the one who treats the VP, figuring that he'd be among the best around.

Then I realized that the VP's mortician did even better work!

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Then I realized that the VP's mortician did even better work!

GRIN!

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I'm probably even colder than Auto-Jim on the subject because I've been seeing 500-plus point drops since 1987.

In 1987, the market was at 200, dropped 120 something on Friday, and then on Black Monday, went down 500. It took about a week to process the trades; the markets weren't set up for the kind of volume they had, and the ticker was running about 2 hours behind, if not more.

It did it again later on at least twice, and then there was the market decline of 2000, when the bottom fell out of the dot.coms. At 9/11, you had another 500 plus point drop, with the market closed for a couple of days.

Here, you've got a number of other factors:
1. INTENSE responsiveness on the part of the capital markets
2. A long run-up in China, where the markets are relatively young and not used to volatility and overdue for a correction.
3. A long run-up in the U.S. markets, which may have been overbought.
4. Potential computer glitches.

I was at work yesterday and didn't realize the market was tanking until late afternoon. Things were quiet. When things are bad, you can sense the electricity. Granted, I wasn't on the trading desk.

Given the communications among the world markets and the fact that they're going 24/7 these days, I'm not sensing a lot of hysteria. The futures markets opened up, the Dow opened up, this IS a buying opportunity, especially for value investors, and now isn't the time to freak out over a one-day air pocket.

People are only worrying about how best to reassure their clients. If you're in individual-equity positions and not diversified among asset classes, you're probably hurting. If you've got a fully diversified portfolio, you're less vulnerable: Jim, do you know about the efficient frontier curve in Modern Portfolio Theory?

At times like this, the best thing for small investors to do is do NOTHING. Let the experts play with short positions. Don't look for awhile, and hope you've got bonds.

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Self-correction. In 1987, the market was at 2100 or thereabouts. The market's hit a high this year of more than 12700, so it's a proportional drop. Paper losses are just those. Paper profits are nicer, but what's good is what you get when you realize the gains.

You guys are in for the long-term. I'm a lot closer to official retirement than either of you, and all I'm saying is "oh damn."

Please, also don't forget that the market's got built in failsafes. It will pause at certain drop-levels. Those failsafes were built in post 1987.

What will worry me is if we see large scale dumpathons by hedge funds and pension funds.

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lagilman

As I said to Jim, all I said in my post was "time to go shopping."

Please don't ascribe panic to my post if you're responding to things seen elsewhere.

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I was speaking about the general market. You know not to panic.

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Jim, do you know about the efficient frontier curve in Modern Portfolio Theory?

Susan, not familiar with that term, but I'm reasonably sure I'd understand it if I saw it. Past a certain level, numbers with dollar signs preceding them start to obey some different rules than numbers I'm normally dealing with, but I've had an on-the-job crash course in capital/non-capital investment from the business side over the past few months, enough that I almost understand it well enough to nod sagely in meetings. :)

I really don't have any individual stuff to speak of, and haven't since I off-loaded my Ford stock at $62.XX/share around the time I left their employ at the end of '98 (since then, F has split oddly in the Visteon spin-off and then has largely tanked and is trading at the $7-8 level these days). I've got some index funds of varying aggression levels and a stable-growth fund as a backup plan. Basically, I've selected my funds based on how they've been managed over their history (knowing that past performance is no guarantee of future performance), with the idea that the folks doing the management of the fund have an established philosophy and will make moves in keeping with that philosophy.

I moved stuff in 2000 and kept it moved in 2001 -- the stable-growth fund wound up with the bulk of it during those high-percentage downturns. I moved back into the other stuff shortly after the upward trend was established (so I missed the basement bargains, but I was okay with that as I'm somewhat risk-averse: I want to see the uptick sustained first). The end result: I've been in net-positive territory every year since I started this. Could I rework things more aggressively to make more? Probably. Do I really want to? Not really. Too much like work to keep up with it all and make frequent rebalancing moves at every market twitch. If I'm making solid double-digit ROI with no more than occasional glance at it while I'm working on, well, work, I can't complain.

Ask me again in 10 or 15 years and you may get a different answer, though. Particularly once K gets through her doctorate and gets her practice established.

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You're doing this yourself? If you can get double-digit ROI in a risk-averse environment, you need to switch careers.

Besides, frequent rebalancing isn't just a PITA, it hasn't been a good idea. The Efficient Frontier Curve is the curve at which risk and return are optimized at various risk/return levels that I think are expressed in Sharpe ratios. This curve is often used to demonstrate the diminished risk and only slightly decreased return produced by a portfolio as it is increasingly diversified.

Google is your friend about this.

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Yep, doing it myself. Sort of. I'm picking funds, the fund managers are doing the hard work. I just have to select the mix of funds for my needs.

Call it beginner's luck, call it blind, stupid happenstance, call it what you will, but having just read a few articles on the Efficient Frontier Curve, covariance, and the Sharpe Ratio, that's exactly what I'm doing when I balance my portfolio, without really knowing what economists call it. It just seemed to make sense to do it that way (particularly the concept of negative covariance: when one is down, another is up, and if you're really doing it right, the one that's up is up more than the one that's down is down). I haven't really sat down and done all the statistical analysis math myself, but it would seem my hunches play well. I just don't have a Nobel Prize for it. :)

And even better... rather than mucking around with individual securities, I'm dancing with index funds primarily, which based on the reading is a nice way of making it simple enough for an engineer to figure out. :D

And is dependent upon a measure of trust that the fund managers are competent, conscientious people who are looking to keep to the risk/reward plan and make moves to achieve that goal. Which is why I'm content to be dealing with Big Established House instead of Bob's Bait, Tackle, and Brokerage House. If Big Established is a bit more conservative because they selfishly want to remain Big and Established, fine by me. As I've said, right now I'll gladly trade a little bit of return percentage for a lot of stability.

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lagilman

just seemed to make sense to do it that way (particularly the concept of negative covariance: when one is down, another is up, and if you're really doing it right, the one that's up is up more than the one that's down is down).

Yep. My finances are relatively simple (Roth and SEP-IRA, mututal funds, etc) but I lucked into a smart guy at Chuck who was fascinated by how a writer needs to structure a conservative investment plan based on variable income streams... I think I've become his pet "do right by her" project. Fine by me!

It also helps that he talks to me as a peer, not "poor thing who doesn't understand FI-nance." I walked out on someone at another brokerage who tried that.

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Ugh. Condescention will get me to walk fast, too.

And we've achieved the Off Topic! icon, I see, so this will be my last on the subject here.

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lagilman

And we've achieved the Off Topic! icon, I see, so this will be my last on the subject here.

Nah, no worries. I just use it when nothing else quite suits. Although I was thinking about breaking this out into an actual Talk About Finance post, if you and the Kzin are agreeable (with the posted understanding that this is Discussion Among Friends Only, No Advice Offered or Intended). ~~As much as~~ Even more than writing neep, financial neep is oft-needed in the genre...

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I'm agreeable, although I don't know how much I can contribute beyond Lessons In Amateur Due Diligence.

I mean, I'll admit to a great deal of surprise that a) my stuff has done as well as it has, and b) it appears that I backed into a nice position (even one backed by sound economic theory!) quite by accident simply through reasonable application of what I considered to be common sense rather than anything resembling a formal education on the ways and whyfors of the market.

That, and the knowledge that one Albert Einstein, when asked what the most powerful force in the universe is, answered, after a moment's consideration, "Compound interest."

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Kzin's amenable, with the following caveats. I'm not giving advice; people should always consult their financial professionals; past performance is no guarantee of future results.

If someone treated you that way, you were wise to walk. It is not -hard- to educate a willing person in finance. One of my specialties is to make the stuff comprehensible. For example, I have been known to explain shortselling in hedge funds in 30 seconds.

I'm now working on a project about account consolidation.

I just got intrigued because Auto-Jim has essentially replicated some of the most important portfolio theory going, without knowing about it and realizing what he's doing. This is most extraordinary.

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Are you calling "correlation" "covariance"?

I'm assuming you check your funds on www.morningstar.com?

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