by Cullen Roche, Pragmatic Capitalism
There’s a general disdain for rising market prices. Why? Because, the odds are, you aren’t participating in all of the gains. There’s some sad math behind the reality of the stock market and that math says we all can’t benefit from the market’s rises. You see, all securities issued are always held by SOMEONE. The market, in the aggregate, is the market. And we don’t all have all of our chips in the stock market, because, by definition, we can’t. When I buy stocks someone else sells their stocks. Again, all securities issued are always held by someone. And the fact that someone owns stocks means someone else doesn’t own stocks.
So, when stock prices go up there’s an inevitable sense of opportunity loss (by someone). You feel like you’re missing out on gains you could have potentially been a part of. You feel like you’re falling behind. This is a perfectly common reaction, but it’s also totally unreasonable and almost certainly misguided. Why? Because we don’t really have to be involved in all of the markets gains all of the time. What we really need our money to do for us is outperform potential purchasing power loss and protect us from the risk of permanent loss in a manner that is consistent with our risk tolerances and portfolio needs. That is, we need to create SAVINGS portfolios that create a sense of certainty and protection in what is really a savings account (not an investment account).
I started Orcam in large part because I want to help people better understand the role of the portfolio in their lives. It’s not there so you can get involved in the aforementioned herding race that many engage in on the way to inevitably underperforming the stock market (as most do after taxes and fees). Your SAVINGS portfolio is there as a residual income from your primary source of income. You get “rich” by maximizing this primary stream of income and then putting it to good use by protecting it and understanding how to construct portfolios that help you avoid falling into the pitfalls that are generated by the fear of opportunity costs.
It’s totally natural to hate rising stock prices. After all, it’s a certain sign that someone is benefiting from something that you’re not. But the worst response to this opportunity cost is to believe that you need to position yourself in a manner that will almost certainly result in excessive risk on the way to chasing returns. That’s just classic herding mentality that will likely result in excessive risk and uncertainty in what is ultimately your savings portfolio. So yes, it’s okay to hate rising stock prices. But it’s not okay for you to respond to rising stock prices irrationally.
Copyright © Pragmatic Capitalism
Feb 15, 2013 Comments Off
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