Trying to understand the global financial crisis? Confused by derivatives and default swaps and the commercial paper market?
Here are three ideas to explain it all: cheap money, surging debt, and bad credit.
Recipe for financial chaos: Take one large economy. Add cheap money—the lowest yields in 40 years. Encourage households to rack up big debts without any attention to long-term ability to repay. End result: a surge in credit card and mortgage debt, driving a consumption and housing boom in the economy. A big-screen TV, a new car, a bigger house, maybe even a vacation home—all available for “no money down” and with “low monthly payments.”
Read more »
Once again, we read the sad headlines about investors misled by an investment manager who had a “sure thing” investment strategy that led to a devastating outcome.
The size and scope of the recent debacle appear unparalleled, raising painful questions: Why do these things happen with some regularity—and to people we consider sophisticated? Why don’t we learn from past mistakes, especially since so many of them have been widely publicized?
Robert Cialdini, a professor of psychology at Arizona State University, was quoted in a recent Wall Street Journal article (subscription required) pointing to three elements that contribute to bad investment decisions made by smart people:
1. The opportunity has an air of mystery about it, and only someone who’s smarter than you are can figure it out.
Read more »
Universal lessons are just that—they apply to everyone, or almost everyone. Sometimes, though, even the most knowledgeable people stray from what they know to be the better decision.
For example, asset allocation is critical, and rebalancing should be done periodically—particularly if your portfolio is more than 5% out of balance. At Vanguard, we promote these practices quite regularly. They’re good practices that disciplined investors should—and do—incorporate into their investing decisions.
What’s surprising (though maybe it shouldn’t be) is that, as a January Wall Street Journal article by Jason Zweig explains (subscription required), even some of the most well-known mavens of the investment world digress from their own investment philosophies.
Read more »
Well, at least Dilbert’s creator, cartoonist Scott Adams, thinks that indexing makes more sense for most investors than picking individual stocks.
In characteristic overstatement, he suggested on his blog that someday it could be illegal for individuals to buy individual stocks, given the harm they might do themselves. He argued that the odds of beating the market are so slim that picking individual stocks is a form of gambling.
Not surprisingly, his musings drew critics. In a follow-up posting on the criticisms, “Warren Buffett and You”, Mr. Adams noted that some writers pointed out that Warren Buffett’s track record proves that individuals can succeed in beating the market.
Read more »
