The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

. . . for a while . . .

03/13/2020

While studying at three different universities, I enjoyed many courses in finance and economics.  But, I only had one course in biology and none in epidemiology, which is actually the most important – for a while.

Sometimes, the rules of investing get suspended – for a while.  For example, diversification is a good thing.  That is because price movements in different assets normally go different directions and cancel each other, maintaining the overall portfolio value.  Traditionally, when two stocks go up together, it is called a positive correlation.  When some stocks go down and some go up, it is called a negative correlation.  Sometimes, the rule of diversification gets suspended, and we have zero correlation, when everything goes down – for a while.

After 9-11, everything went down – for a while.  When the financial crisis of  2008 began, everything went down – for a while.  After the Fed got too aggressive in late 2018, everything went down – for a while.  When the pandemic of 2020 hit us, everything went down – for a while.

A growing area in the investment literature is behavioral finance.  One of the principles is called the error of recency.  That is the tendency to believe whatever is happening now will continue to happen in the future, and it will – for a while.

When the rules of investing get reinstated, investors will be relieved and investment advisors will be thrilled . . .

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