MintLife investing expert Matthew Amster-Burton is addressing concerns from Mint.com Facebook fans. If you ‘d like to ask Matthew a concern about investing, retirement planning, or saving for university, drop us an email.
MintLife reader Patrick asks:
Would you think about an ETF like QQQ or SPY for a 5- to 7-year financial investment, or are these funds miscalculated in the taper or non-taper environment?
and reader Nandar asks:
Heard the stock market might crash once again quickly. Should I offer those stocks that look overpriced?
Nandar, I’ve bad news, pal. It’s definitely true that the stock market could crash again quickly. It’s likewise true that it might not.
For illumination, let us take a look at a number of people who won the Nobel Reward in economics this year.
Eugene Fama is a finance teacher at the College of Chicago. He’s famous as the father of the reliable market hypothesis (EMH).
The EMH says that the rate of a stock (or a bond, or a shared fund, or any easily traded financial instrument) consists of all of the readily available info about the security.
This is sometimes called the “Price is Right” theory, due to the fact that it implies that the marketplace is at least as wise as you are.
If you think you’ve some unique information about when a stock will rise or fall, you are wrong: that details is already factored into the cost.
Wait a minute, states Yale economics professor Robert Shiller. What about possession bubbles?
Sometimes markets go bananas. The price of tech stocks in 1999 or Florida homes in 2007 was not the item of a reliable market, it was the item of greed and hysteria.
And if we can acknowledge bubbles, we can benefit from them by betting against them, by getting out prior to the bubble bursts, or by simply not getting associated with the first place and waiting until they blow over.
What does any of this have to do with Patrick and Nandar’s concerns?
Well, both concerns have to do with whether we can forecast what’ll occur to the marketplace in the short term.
QQQ and SPY are both exchange-traded funds that mirror the price of a basket of stocks, the Nasdaq 100 in the case of QQQ and the S&P 500 when it come to SPY.
And the answer is, you cannot.
That does not suggest you need to believe, as Fama does, that there’s no such thing as a bubble and Shiller was simply fortunate when he alerted about the housing bubble.
You can concur with Shiller and still recognize that the performance of the securities market over the next couple of years will be driven by factors you can not forecast.
That could be good or bad financial news, human irrationality, or alien intrusion.
Indeed, if you look at the Shiller PE Ratio you can see that stocks are miscalculated compared with their historic average.
You can also see that stocks have been misestimated by this step almost continuously since 1997. Yet patient investors have made a lot of cash in stocks throughout that time.
All you can actually do is invest for the long term and according to your own danger tolerance. Anything else, to utilize an unclean word, is speculation.
MintLife reader Bryan asks:
Are bitcoins worth purchasing, provided the stagnation of the world’s economy?
Speaking of speculation, even before I discovered what a Bitcoin was, I understood I did not want any.
Exciting new investments are like new party medicines: possibly chill out for now and let the body on the dance floor be someone other than you.
Then once more, I am a boring guy who buys tiring things like stocks, bonds, and Reese’s Peanut Butter Cup variations (I am bullish on Reese’s Sticks, bearish on white chocolate cups).
Maybe I am losing out on something important. Exactly what’s Bitcoin, anyway?
Bitcoin is a virtual currency. It’s created to be beyond the control of any national government, immune to inflation, and efficient in anonymous (or a minimum of pseudonymous) transactions.
For a really total introduction to the currency, reviewed Felix Salmon’s essay, which has been much-commented by Bitcoin professionals.
That’s the utopian way of putting it. Many protection of Bitcoin has actually focused on two realities: Bitcoin is often used for black market deals, like purchasing drugs online, and its value has fluctuated wildly since the currency was introduced in 2009.
I don’t really have a position on whether Bitcoin has a future as a currency. It’s absolutely intriguing. However “interesting” is a bad quality in an investment. It means two things:
- In the short term, speculators rush in and out. As I write this, the value of one Bitcoin in United States dollars has actually ranged from $175 to $901 in the past month.
- In the long term, we’ve no idea what these things are worth. A lot of business do not accept Bitcoin. (One exception is OkCupid. I am uncertain I prepare to this day someone who pays in Bitcoin.) As an investment, Bitcoin is like gold: you ‘d buy it due to the fact that you think everyone else will want to get in on it throughout a recession. But who understands whether that’ll work?
So if you wish to buy a number of Bitcoins and see what occurs, sure, offer it a try. As a considerable section of your portfolio, however, it would be an insanely risky step.
If you want a brand-new adventure, have you attempted the Reese’s Big Cup?