Over the latest upcycle starting in 2009, we have noted that participants were increasingly value-indiscriminate, trend-chasers, buying–not based on security analysis or investment prospects–but because prices were going up.
Indeed, recent data confirm that some 85% of trading volume in the past few years has come from computer-driven models, high-frequency traders, so-called ‘market makers’, passive funds and indices. This mindless game of follow-the-leader has grown bigger and more leveraged this cycle than ever before in history. To many, it looked brilliant as prices rose far above rational metrics, but few are prepared for the other side of the bargain: indiscriminate selling where prices fall far below rational metrics, and often labor there for years to come. See Behind the Market Swoon: The Herd-Like Behavior of Computerized Trading.
Tragically, in the midst of today’s capital roulette games are mom and pop participants –with real life, time-sensitive needs like housing, education and retirement funds–who are counselled and enticed to ‘buy and hold’ at every price on the way up, and ‘stay the course’ as prices plunge and the herd tramples over them. This is a highly inefficient, devastating strategy for individuals with finite time-horizons. It is also entirely unnecessary.
We do not need to speculate with our life savings–blindly follow the masses– to reach our financial goals. Indeed, the odds of achieving and maintaining strength and stability while doing so, are nearly nil. The biggest part of financial strength comes from careful income and expense management, regular savings plans and debt avoidance. Investing well is part of prudent financial management, but it requires personal discipline and careful rules about when and how much of our principle is allocated where, and for how long.
Today is an excellent time to break away from the madness of crowds and mindfully define a more secure path to your goals. If you would like some help to get started or a review of where you are at, send me an email outlining your circumstances, and I will offer my thoughts and suggestions — happy New Year.
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