Hope to Prosper

This is a guest post by Rob Bennett.  Rob often writes on behavioral finance on the Passion Saving blog.  You can learn more about Rob’s background on his bio page.

You get fired.

You’re feeling very, very, very down. And scared about the future.

What do your friends tell you?

They tell you that someday you will look back at the firing as having been a good thing.

It doesn’t seem possible at the time that that could turn out to be true. It’s just nice people saying a nice thing. But you know what? I have heard lots of real-life stories in which it did indeed turn out to be true. I have had this happen in my own life. 

People who get fired are usually not dumb people or lazy people or bad people. But there’s usually a reason why they got fired. There was a mismatch between what they were good at and what their employer needed from them. For any of dozens of possible reasons, both the employer and the employee put off dealing with the problem until the effects of the mismatch became so painful that a firing was the only way to force a change.

That’s what is going on with this economic crisis. It is a terribly painful thing for just about all of us. But I believe that there is going to come a day when we are all going to look back at it as the best thing that ever happened to us. I believe that there is today a mismatch between how we think stocks work and how stocks really do work that must be addressed and that the mismatch has been ignored for so long that a point was reached at which an economic crisis was the only way to force a change.

I am the world’s leading critic of Buy-and-Hold Investing. Buy-and-Hold teaches investors that it is okay (or even a good idea!) not to change their stock allocations when stock prices rise to insanely dangerous levels (as they did in the late 1990s). I want to see Buy-and-Hold supplanted by Valuation-Informed Indexing, a strategy that posits that investors must change their stock allocations if they are to have any hope whatsoever of keeping their risk profiles roughly constant.

Continue reading The Economic Crisis is the Best Thing that Ever Happened to Us