Musings of a pack rat

Posted by on February 9, 2010 @ 9:22 am in Personal finance

I am a pack rat.

A long habit of cutting articles from newspapers and magazines has left me with several boxes of clippings, only some of which have been sorted into files. On a clean-up crusade, I’ve spent more than a few hours going through the pile, looking to pluck only a few particularly interesting needles from the haystack.

If there’s a redemptive aspect to this effort, beyond a neater office, it’s that old news clippings are a great reminder of the fallibility of human beings.

With the benefit of 20/20 hindsight, it’s easy to see that we’re often worrying about the wrong things, extrapolating recent trends way too far into the future, and succumbing to a tendency to cycle from fear to greed and back again.

A shortage in U.S. Treasury debt

Ten years ago, newspapers reported then-Treasury Secretary Lawrence H. Summers’ prediction that the federal government would by 2013 pay off the $3.6 trillion in Treasury debt then held by the public (not including Treasuries held by the Federal Reserve or owed to the Social Security system). There were worries that a shrinking supply of federal debt would hamper the execution of monetary policy and would take away the benchmarks used for comparison with corporate or mortgage-backed bonds.

Stuff happened since that prediction by Mr. Summers (now chair of President Obama’s National Economic Council). We’ve seen the 9/11 terrorist attacks, wars in Iraq and Afghanistan, federal tax cuts, expanded Medicare coverage for drugs, and wads of spending in response to the 2008 financial crisis and its ensuing economic slump. Markets today focus on federal debt ballooning, not shrinking. In a decade, Treasury debt held by the public has more than doubled to about $7.8 trillion, and the total is rising fast.

The millennium bug

Remember the “millennium bug”? There was fear that computer systems and software would malfunction when the calendar changed from 1999 to 2000, since older programs often abbreviated four-digit years to two digits. In a May 4, 1998, op-ed piece in The Wall Street Journal, Edward Yardeni, chief economist for Deutsche Morgan Grenfell, proclaimed himself a “Y2K alarmist.” He was “sure that we will fail to have all our information-technology systems ready and that the disruptions will be severe enough to cause a major global recession.” He urged preparation for “the possibility of business failures and the collapse of essential U.S. government services, including tax collection, welfare payments, national defense, and air traffic control.”

As it happened, the efforts of information technology professionals (and perhaps some common sense) prevented any Y2K disasters from occurring, though there were some hiccups here and there. A recession did occur—in 2001—but that eight-month economic downturn was attributed more to the bursting of the Internet bubble than to the changing of the calendar.

Gold at $300 and $1,100 an ounce

Eight years ago, gold’s price had once again “rallied” past $300 an ounce—having languished in that neighborhood for several years. Experts quoted in news articles expressed skepticism that the rally would last, citing poor demand for the metal at that price. Fast-forward to 2010 and, with the price around $1,100 an ounce, advertisements for gold are ubiquitous, and cash flow into precious-metals ETFs and mutual funds is strong.

I have no idea where gold prices will go next, but it’s fascinating that interest in the stuff seemed so muted at $300 an ounce, and seems so feverish after the price has more than tripled.

The pack rat’s view

I don’t mean to poke fun at any of the experts cited in these old news clips.

For me, these old stories reinforce the notion that humility is a useful trait for investors. If you—like me—didn’t know gold was a “good buy” at $300 an ounce, why should we believe those who are confident that it’s a good buy at $1,100 an ounce?

I don’t know which of the myriad forecasts available today—for interest rates, stock or commodity prices, economic activity, Treasury deficits, Super Bowl winners, etc.—will prove correct and which will prove merely amusing.

But humility would seem to suggest that since we can’t foretell the future, the right approach for today—or any day—is to be broadly diversified both across and within asset classes.

Ten years from now, I’ll be able to tell you what we should have done in 2010.

Notes: Diversification does not ensure a profit or protect against a loss in a declining market. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.

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