Investing is like going to the dog track ... only play with money you can afford to lose.
I evaluate investments based upon will I be able to sleep at night.
Money and financial insecurity are deeply emotional issues that manfiest themselves as risk tolerance.
Everyone has a different opinion about investing. There is no such thing as consensus, right, or wrong. You need to be at peace with your investments and undertstand what you are investing in.
Growing up, my family was house rich and cash poor - they bought the house in 1975, never took a second mortgage. So when I applied to college in 1988/1989 they counted my parents' net equity in our primary residence against my financial aid eligibility.
My parents did what they were taught were the right things ... stayed married, worked hard, stayed out of debt, provided their kids with better lives and more opportunities than they had.
Only problem, the college financial aid criteria rewarded debt and penalized equity. What my Canadian neighbors met with a financial aid consultant who had them mortgage 80% of their primary residence equity, which they used to buy a vacation home in the Lakes Region of New Hampshire. On paper, the Canadian neighbors had less equity in their primary residence, thus, they qualified for more financial aid.
At times, the system is not fair - it may penalize what you believe to be right and may reward what you believe to be wrong.
In our current tax regime, earned income is penalized, long-term capital gains are rewarded, and saving money is more tax efficient than increased earned income.
If you believe that all you need to do to succeed is work hard and save, you are setting yourself up for failure. Government makes the rules, but they also change the rules, sometimes during the game when it benefits them.
Part of my uncle's retirement plan was to buy EE US Savings Bonds. At the time he bought them, they carried fixed rates and could be rolled over into HH US Bonds tax free - not having to pay capital gains tax on the EE Bonds. My uncle was an accountant. He read the IRS tax code for leisure. As he neared the point of the EE Bonds' maturities, the Federal Government changed the rules - EE Bonds could no longer be rolled into HH Bonds taxfree, and the HH Bonds would pay a variable rate, not a fixed rate, during a time when intertest rates were on a multi-decades long downward trend. Unforunately, this was his main retirement plan outside any penions or Social Security. He put too many eggs in one basket. His plan didn't work as expected because rules and market conditiions had changed.
Nature manages risk by diversification. That's a personal investing principle that I choose to heed. Not only diversifying investments, but also diversifying asset classes, investment vehicles, and financial institutions. I am highly financially insecure and untrusting. I want to diversify - spread - my investments across mulitple institutions, multiple different account types, and multiple asset classes. This helps me sleep at night - I know that if my ship sinks, I will not be alone, I will have much company.
Money can ebb and flow like the tides. My father's maternal grandparents were very wealthy. A combination of events changed the financial trajectories of their descendants. My great grandfather lost much money in the Great Stock Crash of 1929, and he committed suicide. My great grandmother was psychiatrically committed. Her family stole the money meant her young daughters (my grandmother, my father's mother). My grandmother grew up poor as a result. My father grew up poor. My father and his siblings grew up in a cold water flat and went hungry. One Winter, a pipe broke and they were able to skate on the dining room floor for much of the Winter. Well into his 70's and 80's, my uncle kept a pound of bologna and a pound of cheese in his regfrigerator, so he could sleep knowing he would not go hungry the next day.
Financial security is both a reality and an illusion. It's an illusion because believing it's real helps you sleep well at night. It's only real if you can access the money when you need it. When markets crash, liquidity become lacking - there are far more sellers than buyers and market makers may become overwhelmed - unable to fulfill transactions. I've seen this in 1987, 1991, 1998, 2000, 2001, and 2008. When you need cash the most, you may not be able to sell assets for cash - asset rich, cash poor.
2008 was by far the worst I've experienced in my lifetime. For the first time I can recall, money market funds "broke the buck". Money market funds were advertised as being safe vehicles without risk to principal. In 2008, for a brief time, money market funds lost principal value - "broke the buck".
In August 2008, as my wife and I were attempting to adopt, our Home Equity Line of Credit (HELOC) got pulled without warning. We lost the line of credit we were going to use to help pay some adoption expenses. To get cash in the bank, we had to take out a Home Equity Loan at 8%. The adoption fell through for various reasons. We used the remainder of the Home Equity Loan to buy new Honda Accords in January 2009 when the dealership was desperate for buyers. We paid off the home equity loan within 2 years.
Late 2008/early 2009, the Federal Government began picking winners and losers. They made up rules as they went along. They were voiding contracts without warning. They were changing rules as they needed to. Companies were forced to merge with companies that they didn't want; and later penalized for the liabilities assumed in the merger. If bankruptcy had been used to merge a "bad" bank with a "good" bank, the "good" bank would not have been fined billions of dollars for the "bad" bank's illegalities. Contracts were no longer sacrosanct. The Government would void or break them whenever they wanted. Financial market norms were no longer in effect.
After 2008, I modified my relationship with money and investments. I valued principal preservation and liquidity over rate of return. Looking back, I realize this was an over-reaction that cost me potential gains. But I could live with that for a while and it helped me sleep well at night.
It's easy to be detached from your investments when you don't need cash. It doesn't take long to become consumed by anxiety when you need cash, but can't get any. These are the two opposite emotional emotional extremes that drive my relationship with money and investments, and manifest themselves as financial complacency or financial insecurity.
... I shall continue my post-2008 investment saga on another day.
