Thursday, July 31, 2008

Dealing with Losses

Quote of the week:
'Logic will get you from A to B. Imagination will take you everywhere.' - Albert Einstein.

Commentary of the week:

Dealing with Losses:

In most kinds of financial journalism, the story we are told as consumers is that investment losses are possible, but unlikely over the long term. We are told that the world (and the stock market in particular) will probably continue to 'go up' and that if we are investing in something for the long term, there is little reason to worry. As somewhat unsophisticated consumers of this financial fiction, we have very little idea of what it means to 'go up' and what exactly it is that is going to go up. We worry about just our dollars, and hope that each dollar we have put into the 'market' will come back either as a happy family of dollars, or at least as a dollar with smaller kids in tow. Yet even though we believe this to be true, and even though the markets cooperate by indeed going up most of the time in Canada, there is always the inevitable bust every few years that most financial commentators can only explain in hindsight. As you know, we are a bit different here at Ittihad, and take economic uncertainty and the unpredictability of public markets as more of a given. Also given the present investment climate, I think it is best to really begin to prepare for the possibility of monetary losses as the full impact of the bank failures in the US comes to light. This does not mean people pull out their savings, just that loss is as much a part of life as gain is and if we can presume to educate people about how to react when they make money, we should also try and do the same when they end up losing a bit. As it is, we have to be very careful about what is happening in the North American markets right now, so a discussion of some coping strategies to take away the stress of being invested are probably in order.

So, here are the top 5 things you can do (but don't have to) when you see the TSX (and your savings) dropping like the temperature in winter or like a stone in water:

1. Stop worrying already and just Panic - It is after all, your money and if you don't panic, who will? Also, call up your broker, call him names and warn him that you will sue him if he does not personally drive over in the car that you paid for and give back your money in old $20 bills. At the very least, this will calm you down, make you feel like you are in the movies and will thereby make you feel better about the loss. If you actually decide to follow through with your threat, it might also keep your lawyer friend in business while his investments go down even more than yours.

2. Become unreasonable with your kids - Kids love parents who are unpredictable and twitch nervously when the business news comes on. This gives them an opportunity to rebel in even more unreasonable and childish ways so they can thereby become more mature over time. Without this training of how to be unreasonable people, how would they survive in civilized society?

3. Become sullen and / or abrasive at work - Your boss is clearly unhappy at the TSX's lack of spirit because he has even more of his money invested than you, so why should you be nice while he gets to be the bully? Do some bullying of your own, hide someone's mouse or disconnect their keyboard and watch the fiasco as they complain to the IT people, who will no doubt misdiagnose the problem. Do not however, mess with the coffee - that would be mean.

4. Tell yourself the market dip is only temporary - Don't worry, what goes down must come up also, shouldn't it? (or was it the other way around?). History shows that after every bust, there was a boom. So what if you have to suffer through a few years of losses in order to enjoy the good times again? Remember, until the hope is gone, there is always hope.

5. Sell everything else that you own and buy more public stocks - This is for professionals only. Do not attempt this at home, or outside the home. Above all, do not attempt this anywhere near home, or with your home.

What I really like about this list is that the top 3 can be applied in your personal life as well. There is nothing like a bit of panic to wake you up, the kids are there to be pushed around anyway and having fun at work between the meetings is always helpful to overcome the monotony of being bullied.

Of course, the best way to deal with the issue of financial losses is to take some time out of our needlessly busy and cluttered lives and learn how these things really work so we can understand a little bit of what is really going on. In this way, both gains and / or losses will be more expected and so we will have calmer lives rather than becoming emotionally subject to the latest financial rumour. In my humble view, our faith in the financial markets and banks has been so solid for so long that we have become fundamentally unprepared to make decisions about our financial health on our own. To use a particularly timely analogy - if our car kept breaking down, we would either change the car or learn why it keeps breaking down on us. Why then, do we accept both a faulty financial system and such deep public ignorance of it as a part of our life that cannot be changed?

Upcoming Events:

Barzakh Community Services, a charitable, non-profit organization led by Muslim women, has invited yours truly to speak about family financial matters from a Muslim perspective. The event is designed to address issues such as Wills, Taxes and the way to approach the complete financial planning process - so it may be worthwhile for you to attend. Usually I am invited to speak about Islamic Finance, but this presentation will IA be about Financial Planning in general and some of the challenges involved for us as Muslims. I have been told that one of the severest problems within the Muslim community is not really the lack of wealth, but the lack of financial sophistication - so this event should go some way towards addressing this critical issue. Lastly, as this is an educational presentation and we are just helping BCS, you will not need to write Ittihad a cheque at the end. You might still want to support BCS as a community organization however, so please don't leave your chequebook at home altogether.


Finance News:

1. Seems the Globe is a couple of days behind us at Ittihad (hat-tip to Kamran Niazi) ... read more here

2. Excellent column on the future for the home finance market in the US ... read more here

3. This column shows you everything (or almost everything) that is wrong with financial journalism ... read more here

Economic News:

1. Title of the week - ' Do Economists Need Brains?' (I would have asked whether they had brains but then realized that I have economist pretensions as well) ... read more here

2. Inflation is up in Canada also ... read more here

3. The situation in Britain is becoming a bit dire ... read more here

4. Article on whether Inflation or deflation is on the cards ... read more here

Islamic / Middle East / Emerging Markets:

1. Prices in Asia rise as Central Banks fail to agree on measures to contain inflation (as if this is within their power now) ... read more here

2. A new Asian Financial Crisis on the cards? ... read more here

Interesting but not all Finance:

1. The effects of a family feud on business (or business feud on family) ... read more here

2. Why Green and Islamic are somewhat different ... read more here

3. A 'cuil' story about a challenger to Google ... read more here

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