Online Stock Trading

In times like these, one predominating mantra consistently being sung, hummed and I bet by someone even whistled, is the benefits from investment diversification. While most people stare hopelessly at their losses feeling the sinking sensation that they made a big mistake and wonder just how much pain they can withstand before sending their whole portfolio into the hands of eager buyers willing to pay a fraction of what it was bought for, they ask the question, “What could I have done to avoid this predicament?” The answers are abundant. All the finger shakers and I-told-you-so-ers suddenly speak up. Before you know it, they’re the ones asking all the questions: “What, you weren’t diversified?” and “You did plan for this, right?”

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So this guy I knew (John) spent a typical day like as follows: he woke up in the morning, took a shower, slammed down some orange juice in between shirt button buttonings, then rassled with his young son while tying his shoes, grabbed his coffee, keys and cell phone, kissed his wife and went off to work. He plugged away all day, wrapped up this project, started the other project, sat in a meeting, then spirited off to his car to go home. He got home, ate dinner, changed, then went off to the gym and afterward decided to hit the local Starbucks for a late-night latte while he polished off another chapter in the book he had brought along. The next day began much in the same way but this time, while on his way to work he got a flat tire. He popped the trunk and lo-and-behold, his spare was flat. Once he finally got in touch with a friend (Fred) who came to help him get it repaired, his friend asked him one of those famous loaded questions: “You mean you don’t check your spare?”

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The obvious answer is: “No.” No, he hadn’t checked his spare, and if he had, it would have been in good repair and he would have been able to use it for what it was intended for when he needed it and he would have been able to avoid having to ask for help and being asked loaded questions. The dummy.

A better answer would have been a much longer one. Like: “No, I was god-damned busy; I was living life and getting things done.” Sure, John, like Fred, could have pristine spares for all his cars, hell, the regular tires could all be inflated to the manufacturers’ recommended pressures, he could even have stocked sundries at home and in the attic, extra batteries in every drawer, flashlights every fifteen feet throughout the house, a fire escape route, and emergency phone numbers tattooed on his son’s forearm. But among the jugs of water and canned provisions he might have a wife who didn’t care in the least whether she got that kiss in the morning, he might be out of shape, and he might have books sitting on book shelves instead of held in the hands of late owl latte drinkers. Regularly inspecting your spare was the best thing to do only right after you blow a tire. At all other times you weighed doing it against the mere possibility that you might blow a tire. The nature of hindsight is perfect clarity; for what you just passed and not what you’re walking into.

The argument for and against diversification, it seems to me, should follow a similar train of thought. It’s the most useful thing right after you can use it. In addition to that however, besides being clearly useful once hindsight illuminates its utility, its implementation comes at a cost. On the one hand, the story I just told, when used to argue against diversification, might seem stretched to its limits: spare tires, sundries, and emergency lighting are all related to safety and sound emergency planning. Some might say that whatever the costs might be, those costs might never be too high. Being prepared for emergencies might lend comfort to a family with dire needs. But John didn’t need his spare tire. He called Fred. Having spare flashlights and batteries? Hell, have some fun for crying out loud. Gather up the fam and make sport. Camp out in your living room. Pitch a tent. The comfort people plan for is nothing more than the faith they have in the benefits of artificial lighting. Humans have been much longer without it than with it. Relax.

I say the same thing about diversification. For some people, those who are busy doing productive things, diversification, besides being the thing most touted by the I-told-you-so-ers as the advice you long since should have heeded, is also an overreaction of risk averseness. However, by always planning for the worst you might miss out on the best. Diversification’s benefits are founded on the belief that you can minimize losses in one arena by having some assets in other arenas. A good example is stocks vs. bonds. When stocks sink, people rush to the security of income streams from bonds. When peoples’ relative faith in whole economies falters they tend to move assets to more solid things like precious metals. If one takes steep losses in one arena those losses are supposed to be offset by the gains in the others. If you are equally diversified though, and the different arenas perform oppositely (but with the same magnitude), then you could end up breaking even, which might seem wonderful if everyone else is losing money, but when the arenas reverse roles, then you still could be making zero money.

My proposition is this: if you want to diversify in order to minimize potential losses from wild and sometimes irrational markets, do one of the following: 1) Get into an FDIC insured savings account or CD (no risk whatsoever and guaranteed gain) or 2) Don’t be wrong (or at least, don’t be extremely stupid). That’s right. Don’t be wrong. Don’t get into the position of being in the wrong arena. If stocks, for instance, have been experiencing exceptional gains, wake up and realize that at some point (soon) lots of people are going to want to recognize those gains. Get there first. Last one there’s a rotten egg. If stocks have been crumbling, but the economy still seems to be strong, go shopping (I know this great store on Wall Street). Leave for work with a cell phone in case you blow a tire. Have a back up plan. Keep some cash set aside. Know ahead of time that if the lights go out you’re going to have a party. Don’t wait until everyone is all bubbly happy about the stock market to finally decide that it’s safe. Don’t wait until it’s completely fallen apart to finally decide you should get out. Be a little flexible. Dollar cost average. To begin with, buy stocks you think are such a value that you’d be just as happy owning them if they were suddenly worth half as much. Mean it. People do it with cars, right? Might lose 10% once it leaves the parking lot. Buy your neighbor’s car then sell it back to him for more when he decides he wants it again.

It’s time we sing, hum and whistle our own little tune.