In the latest edition of the Sound Investing podcast, published by FundAdvice.com, Paul Merriman, Tom Cock and Don McDonald discuss whether your portfolio is built for the amount of risk you can handle, whether a well diversified portfolio only needs 20 stocks, the outrage if you choose to sell down growth assets now and a discussion of how today's global financial crisis happened and what to do about it.
One warning, the radio show is 51 minutes in length and will use up 23MB of download.
If these constraints are not a problem, I recommend you take a look at the latest podcast - Sound Investing - September 19, 2008
For those who have limited time and/or limited download capability the following is a brief summary of the more relevant material that was covered:
Paul Merriman comments that there is nothing unusual about what's going on. Every time we have one of these periods of significant downturn people tend to panic. Investing in the stock market is about taking risk.
Savvy investors have money in thousands of investments, across dozens of industries and diversified internationally and have a portion of portfolio in bond funds (fixed interest)
Savvy people know that they focus on what they can control:
- Asset class
- Asset allocation
Guest - Author of Irrational Exuberance - Dr Robert Shiller - Professor of Economics at Yale University
Professir Shiller suggests that the solution to the sub-prime crisis
- in the short run we need some bail outs
- in the long run - need to prevent getting in this situation again - democratise finance - allow investors to get better advice
Professor Shiller is promoting subsidised investment advice, as too many advisors are salespeople (including mortgage brokers and real estate agents) suggesting a Medicare style system for good financial advice is worthy of consideration.
What caused all the problems on Wall Street?
Don MacDonald comments that out of all active mortgages around the US, only a few are in foreclosure. The numbers on Wall Street are implying a 50 to 75% default rate. The market value of many of the mortgage backed securities are currently 25 to 30 cents on the dollar implying 2/3 are going to default. No-one expects it to get that bad. But there has been a perfect financial storm.
Don McDonald discussed the risk reward trade-off with borrowing to invest and shows how this pronciplehas translated to Wall Street where investment banks have borrowed a tonne of money to purchase these mortgage backed securities. Unfortunately the assets have declined in value and the climate has moved from one of greed to abject fear. There are no buyers of these securities and the prices have fallen. It does not mean that these securities are worthless. At 30 cents on the dollar means that 70% of mortgages have to default and that's not likely to happen.
Myth or Reality - How many stocks to be properly diversified?
The probability is that a portfolio with 10,000 stocks you are likely to make the same or more than a portfolio of 50 stocks. Therefore the presenters comments that you should protect your portfolio against the risk of being too highly weigthed towards a particular industry or stock and rather take a really well diversified approach.
Paul's Investment Outrage - you can't ever know when the market is at its bottom.
All you are doing by trying to predict is selling low and buying high.