Following the Crowd is Safe?

A classic rant from 2011. Always ask why the crowd is going in a direction, before following. Following the crowd financially can be an expensive mistake.

Safety is Relative

So you think following the crowd is safe, because you are with others?

Ask a lemming if following the crowd is a good idea.Better still ask a cow in line at the slaughterhouse. Everyone else is going in this direction, it isn’t safe?

As you can tell I have been on a Risk management course. I am now full of pithy comments about risk and such. Just because everyone else is doing something, you must at least ask yourself if this is the right thing for you. This is true when it comes to your money.

Many folks who were badly singed in 2008 with stocks are looking for safer places to put their money. They think Putting Money in Bonds is Safe (or at least in Bond Mutual Funds, or Bond Indexes). Normally bonds are safe(r), but there is a perfect storm right now that makes this less safe.

Everyone in the day thought Nortel was rock solid and safe. One misguided financial media maven Garth Turner was still sending misguided investors back into the killing fields of Nortel even as the stock imploded. I remember people saying, “If Nortel goes down, Canada is going to be in a bad way“, or “The Government won’t let that happen“. It did happen, the majority of the herd were wrong again here too.

The experts are saying commodities and Gold are a safe place to hide against wars and all the calamities of today. I don’t understand these markets enough to feel safe in them, so I am staying out of them. Living in Canada I am effectively already feeling the benefits of commodities and gasoline. The Canadian economy was continuing to grow thanks to Oil and Commodities, maybe I should hedge some other ways to take this into consideration?

For a non-financial example look at the proliferation of tattoos in younger folks, is this the right decision? I have no idea, but my “not following the crowd” comment to my kids is, get into Dermatology, because in 20 years all those butterflies are going to be condors, and their owners are going to want to have them removed (oh and all those folks getting multiples piercings are going to want them filled in too).

The Herd is Right Sometimes

Most of the time, most of the people make mostly correct decisions. This does not mean there should be a blind following on your part, especially when your money is involved. You must ask questions about why your money should be where it is. Why it should go where folks think it should go, and don’t follow simply because everyone else is doing it.

Remember what your mother used to say, “If everyone jumped off the bridge would you follow them?”, kind of like what I did with Nortel.

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Bonds are not a Safe Haven Right Now

One of the nice parts about writing this blog is I have met some folks who know a great deal more about Investing and Investment vehicles, and one of those is our friend Preet Banerjee. I met Preet through the Canadian Capitalist (for those who don’t know the story look at the N.C.F.B.A. links on my sidebar most of these members have dinner and discuss things every few months), and he has been kind enough to explain a great many things to me about investing and such.

The last time we met, I asked Preet if he might be doing a post on Bonds and how many folks think they are a “safe” investment and he promised me one was in the works and here it is: The ‘safe’ part of your portfolio could get you in trouble. If you have not read this article in the Globe, please go do so, especially if you are or are thinking of investing in Bonds and you are not advanced in the nature of Bonds.

Handcuffs

Standard Smith & Wesson Handcuffs

This is not talking about the CSBs (Canada Savings Bonds) you grew up with, these are the Bonds that are in Bond Mutual Funds, or Bond ETFs, we are sort of in a perfect storm for these vehicles to lose their investors money (when in fact the investors think they are in a very safe place).

Interest rates are so darn low, that any small change (like a 1% change), can cause these funds to lose money. I won’t go into details, because I don’t think I am sophisticated enough to do the topic justice, but just understand that if you think your money is “safe” in a bond fund, you need to think again.

If you want safe and boring growth, GICs or CSBs are the choice of boring, milk toast, don’t want ulcers (or growth) investors, stick with those for now, if you want safe (and incredibly slow) growth.

If you want safety, make sure you know that it is safe.

 

 

 

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