Musings of a Wise(?) Investor…
February 21st, 2006
One of the big things that my Investment class has taught me is how to be “Wise” in my investments. This isn’t just one lesson, but several, ranging from a change of perspective regarding money to a debunking of many common stock-market fears. In the end, it’s really just a question of education and understanding, but some of the thigns I’ve learned in the interim have surprised me.The first lesson was that of risk tolerance- I am, apparently, effectively risk-neutral. This means that if you give me some money, I have little to no problem dropping it into a high-risk high-yield security. Apparently I am far more risk-neutral than any of my classmates. Mind you, I’m not dumb about it: I know how to diversify a portfolio given various criteria, so that I remove the majority of unsystematic risk. However I have no problem dropping all my money into stocks rather than hedging my bets with risk-free treasury bills.The second lesson was more of a revelation of how fast one can make money in the stock market, even if you hold a diversified position. For instance, a few hours of stock analysis has given me a portfolio whose past performance indicates a future monthly 5% gain, with a standard deviation somewhat less than that. In laymans terms, it means that the chance of the portfolio performing better than 5% is 50%, and that the chance of said portfolio losing money is 25% or so. Yes, yes, I know there are constant ups and downs, and the market in the short term can grant far more substantive gains if you trade off of a live news feed, and who knows what the stock is actually going to do, but there’s always risk there as well. In my case, I’m doing long term analysis… and a long term portfolio projected to grant a monthly 5% return? Assuming averages, that’s 79% annual. Risk? Well, yeah, there’s always risk. Read paragraph above.The third lesson was that of education. Now that I know how things work? Now that I have methods I can apply? All of a sudden I am far less frightened of investing money, the end result of which made me take out more student loans. I’d rather invest my surplus income at a risky 5%/month now and pay off the 0.4%/month loans on a regular schedule. Not only do I increase present and future cash flow, I also gain a decade of regular loan payments on my credit history and a cushy little deduction on my tax return every year. I can always liquidate my investments to cover any loans in an emergency.The fourth lesson is that of lifestyle. Pittsburgh’s low cost of living is giving me the opportunity to invest a significant chunk of my income (No kids, no girlfriend, paid off car, etc), and yet so far I haven’t been doing that. This is… not good. Not good at all. I’ve been scrimping and saving for old loans and obligations, never realizing that a different perspective on my income will give me a huge amount of extra cash to play with, now and in the future. Mind you, this is now going to change. But I’ve lost a bit of time.
There are more lessons, many of which I really don’t need to list out here. What’s important is that I want to apologize to everyone to whom I’ve given unsound financial advice in the past. Student Loans are good- they are *very* cheap money (see lesson three) for what they offer, and if you don’t pay more than the monthly payment, you have remaining cash flow to provide you benefit today or in the future (be it via expenditure or investment).
Ok, enough rambling about money. Back to work 
No comments yet.