Friday, November 7, 2008

Welcome to Risk

If anyone feels jaded about the falling stock market and the rising layoffs, foreclosures, national debt, the cost of commodities, you name it; whatever losses you feel now are most likely because you aren't considering the element of risk.  Any financial action on our part has an element of risk whether it be buying a house, selling a house, transferring jobs, buying a new car, starting up your own company, becoming a real estate broker, becoming a mortgage broker.  Yes, the times were good.  Anyone who had a house thought they were Warren Buffett.  Yes, everything keeps going up...until it goes down, that is.  I bought a house very near the peak in the housing market bubble.  Yes, I knew it was risky.  I knew I could lose my job (which I did), I knew it could get hard to survive (which it did), but I also knew that the seemingly endless riches that the Carlton Sheets of the world would not last.  Maybe our lives are simply more liquid than ever.  Perhaps we should have concrete plans to build equity, but that's where the art of investing comes into play.  It is easy to make money in the stock market.  However it is even easier to lost money.  Take the Dow.  At this very moment it is at 8,868.  It has lost 10% in the past two days.  It is down 33% on the  year, so it can only go up, right?  Well, in the long term, hopefully yes.  Same with housing prices.  So here's the deal.  Anyone you know (and I'm sure everyone knows a few lucky bastards), who sold a house or happened to work for Microsoft or Dell or Google and cashed out at the peak of the market (or anywhere near), must seem like they are financial geniuses.  We all know the truth.  They are the black swans.  However, there are those who honestly did know that the prices were a good place to cash out.  It doesn't matter that the prices were inflated or real, but they knew when to sell.  They know that any money they have invested is at risk of loss.  So when you reach your financial goals, reevaluate your investments and don't get too greedy.  If your stock is up 30%, then it is a good time to take some profits off the table.  If your home value is up 30% then sell it?  Well, if it's an investment property.  If you are working for a company that went IPO and your stock is soaring?  The day you are vested, take out all you can and run for the hills.  If you don't then risk might come back to bite you.

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