Tuesday, April 16, 2013

Zen and the Relativity of Financial #Risk

Too much gold… too much cash… too great a holding in your employer’s stock…

Diversification is as old as investing itself.  At its most basic definition, diversification simply means that you should diversify your investments over a few different asset classes, rather than one (or a few).

Many US homeowners lost all their equity (assuming they had any to begin with) during the recent housing market collapse.  The simple math behind this investment dilemma is that homeowners ‘bought’ more house than they needed, and for more money than what they were able to afford… with the bank’s money.  Stupid home buyers propped up by stupid bankers!

How could you lose “all your equity” on a residential home, you may ask?  Well, you may have bought the house with 3% (FHA) down, or put down 30% of your hard earned, saved cash.  Either way, you didn’t buy the home - the party that contributed the balance of the purchase price that you did not have, bought the house for you, and you rented it from that financier (the mortgage company, or bank), regardless of whose name appeared on the title deed.

Also, if you bought a house and your were paying $x monthly for the mortgage, $y for annual property tax and $z dollars for upkeep and maintenance… you didn’t have an asset to begin with, but a recurring, ongoing, monthly liability!

Add to these woes a stock market that’s been up and down, frequently by >1% in one day, a collapse in the price of gold, ‘high yield’ bonds delivering low yields, employees losing their jobs (and not being able to find work when unemployed), general lack of political will and direction, overinvestment in one investment vehicle or class… and you end up with a recipe for a really disgusting minestrone!

Employees often benefit from buying their employers’ stock at a discount, or may even be given stock in lieu of cash.  This ranges from large, publicly traded companies offering their employees a discount of e.g. 15% of the market value of the company’s stock, to start-ups that have no money... and give employees company stock because the start-up may not have enough cash to pay its people.

The concepts above are attractive to most people.  Unfortunately, many ‘middle class’ members may own too much of their employer's stock AND live in a house that is owned by the bank (did you miss the section 3 paragraphs above?).  Regardless of the fact that this may represent a somewhat diversified investment strategy – property and equity – you may inadvertently have ended up with a concentrated position, i.e. an equity position in your employer’s stock, while you spend most of your monthly income paying rent (to the lender of your mortgage on your house).

How to diversify then?

Firstly, debt is the classic middle class trap – student loans, home loans, credit card debt, cars on leases, etc.  Get rid of it.  Secondly, manage yourself out of your concentrated positions. 

If you own too much of your employer’s stock, sell some and move that cash elsewhere, e.g. into other stocks.  If you live in a mortgaged house and servicing that debt costs you e.g. more than 30% of your net income, get out of that concentrated liability position by downsizing, renting out a basement room, refinancing, etc.  Stop living above your means – this is your greatest financial risk; causing you to run the risk of not being able to service your debt, should your circumstances change unexpectedly!

There is no singular safe investment. Cash declines daily, even if only as a result of inflation.  Gold – an investment with fundamentals based entirely on shiny – is only a psychological safe haven until the next crash.  Equities are volatile, constantly going up and down.  Safe paper investments (treasuries, municipal bonds, etc.) offer returns commensurate with bank savings accounts, i.e. almost nothing.

Work to create a truly diversified investment position, mixing some property with equities, cash and other investments (anything of appreciating value). Feel like buying gold because it's suddenly cheap again - maybe allocate 5% of your portfolio to a gold ETF, perhaps by reducing your cash position from 15% down to 10%.

Good luck managing your financial risk, diversifying your investments... and may your returns be stellar!

Zen and the Relativity of #Risk

  1. On September 11, 2001, 19 militants associated with the Islamic extremist group al-Qaeda hijacked four airliners and carried out suicide attacks against targets in the United States. Often referred to as 9/11, the attacks resulted in extensive death and destruction: Over 3,000 people were killed during the attacks, including more than 400 police officers and firefighters.
  2. On December 14, 2012 Adam Lanza, fatally shot twenty innocent children and six adult staff members at Sandy Hook Elementary School in Newtown, Connecticut. 
  3. On April 15, 2013, someone created, carried, placed and detonated two explosive devices at the Boston Marathon, that killed three people and maimed and/or injured more than 100 innocent people.
Shocking examples of life and sudden, unexpected death, in a society that glorifies violence via movies, video games, sermons, political action, and more!

However, every month, the number of people killed by gun violence in the United States equals the tragedy described above as 9/11… that’s right, more than 30,000 gun-related deaths per year (some self-inflicted), or almost 3,000 per month.  And America mostly shrugs, while millions claim rights to keep and bear arms under The Second Amendment.

I’m not judging; only providing facts… you can be the judge.

I find the relativity of risk among people in the U.S. fascinating to observe.   

Few people go about their daily lives exhibiting a great fear of being shot and killed on any particular day.  But, on the other hand, we are willing to walk through airport security terminals half naked in order to achieve a relative mindset of safety.  This, regardless of the fact that the statistical change of dying in a plane crash – 9/11 included – equals that of winning the lottery… i.e. virtually zero!

Around this topic exists a large degree of hypocrisy.  But somehow we have become immune to this character trait in our common observations of religious leaders; political figures; biased media reporting, reporters & topics covered; all complemented by unfiltered Twitter feeds that offer opinion from all manner of often unidentifiable pundits, instantly, in real time.

I purposely chose to headline this post with the word Zen.  In my youth, I was fortunate to be able to read and absorb Robert Pirsig’s bestseller “Zen and the Art of Motorcycle Maintenance.”  If you haven't read this book before, you should.  People who strive to kill other people should also probably read it, but probably won’t.

For the geeks: Zen is derived from the Japanese pronunciation of the Middle Chinese word dʑjen (or the Modern Mandarin word Chán), which in turn is derived from the Sanskrit word dhyāna which can be approximately translated as "absorption" or "meditative state."

Let’s focus our attention first on absorption.  On April 15th 2013 I saw graphic pictures of some of the victims of the Boston bombing that I wish I could unsee.  But alas, I have already absorbed that visual content and I’m likely to retain it forever, albeit that I may think of it less and less, over time.

In a meditative state I should always be able to enjoy personal solace for a while, appreciating the people that I love and who love me, all the wonderful things that surround me daily, the fact that I want for so little when others have so much need. 

We cannot always elect what to absorb, but we can certainly control our meditative state.

Freedom of religion is a constitutionally guaranteed right under the First Amendment. The Second Amendment protects the right to keep and bear arms.

The latter Amendment was adopted in 1791, along with the rest of the Bill of Rights.  It may be a little out of date in 2013, perhaps requiring a Constitutional Amendment to make it more current?

More interesting – to me anyway – is the fact that there appears to be a great demographic overlap between religious zealots who cling to the right to keep and bear arms, and those who embrace freedom of religion In the United States.

Arguably, freedom of religion may just as well have been penned as freedom from religion, and such a minor edit may have achieved better results?  After all, Jefferson’s intent was the separation of church and state, and he was a secularist, rather than a believer.  His writings questioning the existence and purpose of a god are well preserved, and readily available for review.

It is ironic then, that some people would support everyone’s right to freedom of religion… unless a particular, fanatical, fundamentalist religious group intends to kill them.  Hypocrisy?  Adaptation of the Constitution (or its Amendments) to suit one’s purposes and/or interpretation is no different to the adaptation of religious scripture for the purposes of suiting one’s own beliefs and/or requirements.

It is possible that these two topics, in combination, may be two of the most significant contributory banes of the United States’ future prosperity.  Ridding generations of a right to own guns and a right to serve any and/or all extra-terrestrial, imaginary beings is probably way overdue.  Unfortunately, this good riddance may require another generation or two, in terms of time.

As was the case 5,000 years ago, during the time the Abrahamic scriptures were written in Mesopotamia, religions zealots are still killing other people in the name of their god, even today.  Fortunately, mad people like Adam Lanza may be an exception to this nuisance and not the norm… otherwise; the proverbial ongoing holy war that is being waged will be allowed to continue in perpetuity, unabated.

Blind acceptance of anything is arguably just as feeble as blind rejection of anything! 

Let's strive to become educated, informed and begin to change our world.  Start with your children, one hug at a time, repeated as often as possible.  Teach and train them well, aspiring to achieve what our (and past) generations had failed at... horribly!