Rationally Irrational

A friend called me up last night. He was open about how spooked he was when he looked his retirement accounts and found that 30% (or more) of his hard-earned money had disappeared – with nothing to show for it. The way he put it, I really couldn’t argue with him. It was a completely rational argument.

It didn’t stop me from trying. He’s probably one of the most logical and rational people I know. The argument that I came up with was, “You’ve got 30 years before you reach typical retirement. Then you may have another 30 years after that. Do you think that over the next 60 years this week’s blip will really impact your portfolio that much?” I’m not even sure if I bought the argument because losing a lot of money at once makes it more difficult for your money to grow. Still, the argument of time should work and if you don’t believe me, Ben Stein wouldn’t lie to you. :-)

Here are a couple of other snippets from the conversation:
My Friend: I feel like I should buy a new television, so that I have something to show.
Me: I actually did buy a new television this weekend. It wasn’t for that reason, but it seems to me that it would have depreciated less than a lot of investments this week [I then laugh as I hadn’t thought about that until now].

My Friend: I’ve realized something in this. I have been paying money to someone to lose my money. I figure I can lose my money on my own.
Me: That’s been my theory for some time now. (Note: What I should have said was, “If you diversify yourself enough, keep expenses low, you probably don’t need a professional to manage your money. In fact, I usually find that they push you towards options that have more fees and kickbacks for them. I’m waiting for Chris Hansen get tired of going after child predators and start going after financial predators.”)

My Friend: So you like this Vanguard Total Index Fund (symbol: VTI)? What about Spyders (symbol: SPY)?
Me: Well the VTI tracks the Wilshire 5000, if I recall. SPY tracks the Standard and Poor’s list of 500 companies they consider important. I tend to think that they are very similar, but SPY might focus on larger companies. Either way, there’s going to be a lot of overlap in the two. I would look into something like Vanguard’s Ex-US (symbol: VEU), which focuses on companies that are outside of the United States.

My Friend: I don’t know how I feel having my money outside the US. Have you seen what happened to Iceland?
Me: Yeah and the Russian markets only seem to open twice a week. Still, what happens if the US runs into a major downturn. You have your job here and your investments here. Seems like a lot of eggs in one basket. (Note: I wish I had read this on the VEU: “The Index includes approximately 2,200 stocks of companies in 46 countries, from both developed and emerging markets worldwide.” That means I would be tracking 7,200 stocks around the world in the purchase of two stock symbols. Would I care much about Iceland?)

My Friend: You know that PowerShares Agriculture Fund (symbol: DBA) sounds decent. People are going to eat no matter what, right?
Me: That’s my theory.

I look back on it and it seems like we were both completely rational. Yet in someways I wonder if we were irrational in a few cases. I hope that I was decently rational here, but you never know. I tried to pretend that I was an actual accredited financial guy, but it’s important to understand that I’m an average Joe without any specific education/training in any financial area. I just do a lot of reading.