Sunday, August 14, 2011

Downgrade- Stick To Your Guns

In the 1960s, a college professor named Eugene Fama published a thesis on his theory called the "efficient market hypothesis." Fama claims in essence, that whatever price a stock is at reflects exactly what that particular stock is worth. Fama assumes that with all the rapidly accessible information investors can use to help them make decisions, the entire body of investors can price a stock of a company exactly what it is worth.

Fama's theory is not accepted by many investors because of the fact that many people are speculators ( people who form a theory or conjecture about a subject without firm evidence.) Just because people are buying a particular stock does not mean it is worth anything. Fama's theory was essentially debunked with crashing of the dot-com bubble. Many of the internet start-up companies of the '90s had no real value or earnings, but people were   buying them like they were going out of style!

With the downgrade of the United States's credit-worthiness on August 5, 2011, the stock market naturally lost a lot of money. Depending on your investment strategy, you may have sold a lot of your portfolio, or just held the course. I went into about 90% cash a few days before the downgrade, because i was worried about the congressional debt-ceiling debate. I didn't even see a downgrade coming! Luckily it was a good move, but it was not in my investment strategy.

Sticking to a strategy is the wisest thing you can do. It keeps you on track, honest, and makes investing a bit more automatic and less of a hassle. Having a strategy can also help you measure performance and make changes accordingly to your under-performing securities.

Since I do not agree with the "efficient market hypothesis," I sold in early August because I detected panic in the market. This was my first time in my investing career I had to stray from my plan, but in a way I just created a new strategy. I was confident in my decision and that is what matters most. Investing does not have to feel like gambling (even though we all can say it sure feels like it sometimes.)

-If your investments are handled by a professional, trust them. If you don't trust them, find a new manager you do trust. Let them help you, but always know what they are doing.

-If you manage your own investments, have a time maybe 2-4 times a year to rebalance your portfolio if you are not very active.

-If you manage your own money and are actively investing or trading, stick to your guns!  


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