The gophers have moved back across the street.
Now he’s going to go buy one of those high-pitched gopher whiny things. Hopefully the little fellas will just keep moving further down the street in the other direction…
“I’m so glad I don’t have to date anymore – you know, having to go buy new underwear and all that stuff.”
– a female co-worker who has obviously been married for a long time, and presumably hasn’t had to go underwear shopping in quite a while, 10/13/11
My day job deals with investments. I’m licensed to sell securities and insurance and whatnot – the rules and regulations that apply when you’re licensed are practically endless.
I have to disclose this web site, my Twitter account, my FaceBook page – anything I do that’s personal, but still public. My emails at work get saved for 5 years, searched for key words; and everything gets copied, scanned, approved, filed, and documented…
Once a year, we get a visit from our Compliance Department. They come through, look at customer files, ask us questions, make sure everything is on the up and up. Usually we get visited by Tom and Rex – our 2 Compliance Gurus. It’s pretty natural to dread these visits – they must know that their names don’t always elicit a whole lot of excitement (poor guys)… yet they are 2 of the best guys you could know.
I’ve tried to adopt a motto over the years of “Compliance Is My Friend.” They don’t want to bust me – they want to keep me out of the ditches. Sometimes they do end up busting me, but fortunately it hasn’t happened too often.
So last week when we got our annual visit from Compliance, I decided to invite them to lunch. We had a good time! Well, I had a good time, I hope they did too. They told me that they don’t get invited out that much but I think they still manage to eat pretty well while they travel. (And WE’VE never been invited out by THEM, ahem…)
Tom and Rex are 2 really nice people. I share some common experiences with each of them, and we’re all fairly particular about our record-keeping; in some ways we have similar personalities.
During our lunch, we talked about movies. I asked them what some of their favorite movies are – and got really different responses from both of them…
North By Northwest
Star Wars, episodes IV, V, VI
The first 3 Raiders of the Lost Ark movies
He even admitted to liking romantic comedies…
So, now you have a brief introduction to the Compliance Department. Remember, they are your friend.
OK, today we’re going to go over some basic investment theory. Wait! Don’t leave yet! I promise, this is interesting. OK I can’t really promise that. But stay with me here and see what you think.
One of the basics of investing is what’s referred to as “Modern Portfolio Theory.” In a nutshell, MPT states that you can reduce the volatility, or risk, of your investments through diversification. If you had $100,000 to invest and you put it all into Apple stock, for example, this is considered risky, because you have all of your eggs in that proverbial one basket. If you took that same $100,000 and bought 10 different stocks of companies in different sectors of the economy, you would be spreading your risk over a broader area. This is considered safer.
Are you with me so far?
Modern Portfolio Theory also states that one’s investments are subject to 2 different kinds of risk – systematic risk and unsystematic risk. Systematic risks are things we can’t necessarily protect against with diversification – they affect everyone, such as recessions, interest rates, etc. Unsystematic risk is risk that’s associated with a particular investment. Like, Apple stock is subject to a different set of risks (tech spending, cost of electronic equipment) than, say, McDonald’s (unemployment, the cost of potatoes).
There is one more piece to MPT, but we’ll get to that another day. OK, so you’re asking yourself, why did she tell me this?
Well just like looking at relationships in the context of tattoos, we could also look at them in the context of investment theory.
Would you say that diversification in relationships is good? Do you prefer to diversify to reduce risk within one relationship, or diversify across several relationships? Should I find a man for each facet of my personality? The most culturally acceptable route is the two-person approach. I could argue that this is definitely “putting all your eggs in one basket” – but most of us find a way to make it work (however don’t get me started on the “buy and hold” approach…). So maybe instead of investing $100,000 in shares of Google, you could invest in an Allocation Fund – one mutual fund that holds many other mutual funds within it. For diversification. You’ve got your Large Cap, Mid Cap, Small Cap, International, REITs (real estate), etc. All in one fund. Well if I could only invest in one thing, this is what I would go with. Someone who has a little of everything I’m looking for. There isn’t one person who will fill ALL your needs, but why not get as close as you can? Maybe if I’m wanting to invest more in Mid Cap, I’ll look for someone who’s more heavily weighted to this area…
You can always scrounge up a few extra bucks to invest in a few other “satellite positions” to fill other needs (friends, co-workers, etc).
As for systematic risk – well that’s never going to go away. There are always those pitfalls that come with dealing with other human beings. But we wouldn’t want it any other way, would we? And unsystematic risk – stick with that allocation fund approach and you reduce it a little… but it’s up to you to make your choices wisely…
At the end of the day, there is always risk, when you are looking for reward, so deal with it. We might be risking a lot sometimes, but the payoff is huge – beyond calculation.
(In the next installment, there will be GRAPHS! Wooooooo!!!!!)