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This crisis will uncover a lot of overleverage and insufficient reserves. A lot. Just to think how many of my friends have an incredibly high percentage of the

This crisis will uncover a lot of overleverage and insufficient reserves. A lot. Just to think how many of my friends have an incredibly high percentage of their net worth in stocks ...

HenryKissinger 7y ago
Stocks will recover. Of greater concern are workers who cannot afford to miss a paycheck while being otherwise financially responsible, even more so if they have children to provide for.
- H8crilA 7y ago
  That's exactly my point with stocks and being overleveraged on them. You may not be able to wait for them to recover if you lose your regular incone. Also recovery can take decades, depending on how this plays out. May also be rather quick.
  - rwmj 7y ago
    By "being overleveraged on [stocks]" do you specifically mean that people were borrowing to invest in stocks?
    - hrpnk 7y ago
      Some Eastern European countries had investment products offered by insurance companies, where you sign up for investing a fixed amount monthly for 10-15y with huge exit fees if cancelled prematurely. The high fees are meant to cover for the commissions for the sales people of those products. I can imagine that other countries also have similar products where it's difficult to pause the regular investments unless invested manually.
      - rwmj 7y ago
        I have one of these (called an endowment policy). It was a spectacularly terrible investment. Luckily the amount I pay in (£10/month) isn't going to make me go broke. Until the beginning of this year it looked as if I might make slightly more than the nominal money I paid in - yes it really was that bad. But with another dose of bad luck it matures this year so it'll likely be worth 30-60% less. Oh well, it was a learning experience.
    - H8crilA 7y ago
      Not only, just having 80% of your assets there may be a serious issue. You may be forced to tap into those savings at the worst time.
      - rwmj 7y ago
        That's not what overleveraged means[1]. For younger people at least the conventional wisdom is it's completely fine to have 80% or more of your wealth tied up in the stock market. [1] https://www.investopedia.com/terms/l/leverage.asp https://www.investopedia.com/terms/l/leverage.asp
        H8crilA 7y ago
        Technicalities. For me leverage is any kind of a bet that "I'll be able to support this situation". There's no practical difference between a "brokerage margin call" and a "need money in my life call" and "oh shit I'm out call". The conventional wisdom is based on theoretical returns, not actual performance of investors. Look up how did the average investor do in the legendary Magellan Fund. Much much worse than the fund.
        mardifoufs 7y ago
        But that's literally not what leverage means. Selling stock because you need money is easy and to be honest, a 20% drop is really not that bad. Stocks are still super liquid right now. Also, investing in corporate bonds, "safe" mortgage REITs, foreign bonds, which are all usually considered to be safer than equities would have caused a much bigger loss. All things considered, equities are holding up quite well. Unless you think they should've been in cash, but it would've been weird to miss years of good returns just because a black swan event could happen That's why saying leverage isn't just "a technicality" at all. Being leveraged means that you could have lost everything with just a 20% drop. You can't just ride it out if you get liquidated because you couldn't meet your margin calls. See, I don't know how such a "mild" drop would affect most people in the short/medium term unless we are assuming they have to cash out most of their portfolio or are retired. But that's not the case with leverage. There's a big difference between -20% and -100%
martythemaniak 7y ago
Well, it sucks to have your savings halved, but holding stocks doesn't cost you thousands of dollars per month
whack 7y ago
I have ~100% of my net worth invested in ETFs around the world. You can always sell your stocks if you find yourself needing liquidity, as I've done multiple times. Yes, it sucks to sell at a loss. But it's still a smaller loss than the opportunity cost of not investing that money.
Slartie 7y ago
I would probably qualify for that group, since I have about 80% of my net worth in stocks. Or, to be more correct: I had. Now it's 20% stocks, 80% cash. I sold a good part in December and January, because I considered that heavy upward price action to be unreasonable and a harbinger for at least a modest correction in the near-term, for which I wanted to have cash on hand to buy the dip. Turned out to be a bit early, I left some potential gains on the street, but I considered that Coronavirus situation (in China, back then) to be too risky for jumping back in, and when the first signs of uncontrolled Coronavirus outbreaks surfaced in Europe, I sold most of the remains at the beginning of the slide, while the market was still within 5% of its peak and just kept a few, some small positions that have been at huge losses already anyway and some larger positions in the healthcare sector (which have fared pretty well until now, I even realized some profits day-trading them in the meantime). So: just because people have had most of their money in stocks doesn't mean they necessarily still have. The beauty of stocks, especially for small private retail investors, is that they are extremely liquid, and not everyone uses a "buy-and-hold" strategy.

This crisis will uncover a lot of overleverage and insufficient reserves. A lot. Just to think how many of my friends have an incredibly high percentage of their net worth in stocks ...

HenryKissinger 7y ago

Stocks will recover. Of greater concern are workers who cannot afford to miss a paycheck while being otherwise financially responsible, even more so if they have children to provide for.

H8crilA 7y ago
That's exactly my point with stocks and being overleveraged on them. You may not be able to wait for them to recover if you lose your regular incone. Also recovery can take decades, depending on how this plays out. May also be rather quick.
- rwmj 7y ago
  By "being overleveraged on [stocks]" do you specifically mean that people were borrowing to invest in stocks?
  - hrpnk 7y ago
    Some Eastern European countries had investment products offered by insurance companies, where you sign up for investing a fixed amount monthly for 10-15y with huge exit fees if cancelled prematurely. The high fees are meant to cover for the commissions for the sales people of those products. I can imagine that other countries also have similar products where it's difficult to pause the regular investments unless invested manually.
    - rwmj 7y ago
      I have one of these (called an endowment policy). It was a spectacularly terrible investment. Luckily the amount I pay in (£10/month) isn't going to make me go broke. Until the beginning of this year it looked as if I might make slightly more than the nominal money I paid in - yes it really was that bad. But with another dose of bad luck it matures this year so it'll likely be worth 30-60% less. Oh well, it was a learning experience.
  - H8crilA 7y ago
    Not only, just having 80% of your assets there may be a serious issue. You may be forced to tap into those savings at the worst time.
    - rwmj 7y ago
      That's not what overleveraged means[1]. For younger people at least the conventional wisdom is it's completely fine to have 80% or more of your wealth tied up in the stock market. [1] https://www.investopedia.com/terms/l/leverage.asp https://www.investopedia.com/terms/l/leverage.asp
      - H8crilA 7y ago
        Technicalities. For me leverage is any kind of a bet that "I'll be able to support this situation". There's no practical difference between a "brokerage margin call" and a "need money in my life call" and "oh shit I'm out call". The conventional wisdom is based on theoretical returns, not actual performance of investors. Look up how did the average investor do in the legendary Magellan Fund. Much much worse than the fund.
        mardifoufs 7y ago
        But that's literally not what leverage means. Selling stock because you need money is easy and to be honest, a 20% drop is really not that bad. Stocks are still super liquid right now. Also, investing in corporate bonds, "safe" mortgage REITs, foreign bonds, which are all usually considered to be safer than equities would have caused a much bigger loss. All things considered, equities are holding up quite well. Unless you think they should've been in cash, but it would've been weird to miss years of good returns just because a black swan event could happen That's why saying leverage isn't just "a technicality" at all. Being leveraged means that you could have lost everything with just a 20% drop. You can't just ride it out if you get liquidated because you couldn't meet your margin calls. See, I don't know how such a "mild" drop would affect most people in the short/medium term unless we are assuming they have to cash out most of their portfolio or are retired. But that's not the case with leverage. There's a big difference between -20% and -100%

martythemaniak 7y ago

Well, it sucks to have your savings halved, but holding stocks doesn't cost you thousands of dollars per month

whack 7y ago

I have ~100% of my net worth invested in ETFs around the world. You can always sell your stocks if you find yourself needing liquidity, as I've done multiple times. Yes, it sucks to sell at a loss. But it's still a smaller loss than the opportunity cost of not investing that money.

Slartie 7y ago

I would probably qualify for that group, since I have about 80% of my net worth in stocks. Or, to be more correct: I had. Now it's 20% stocks, 80% cash. I sold a good part in December and January, because I considered that heavy upward price action to be unreasonable and a harbinger for at least a modest correction in the near-term, for which I wanted to have cash on hand to buy the dip. Turned out to be a bit early, I left some potential gains on the street, but I considered that Coronavirus situation (in China, back then) to be too risky for jumping back in, and when the first signs of uncontrolled Coronavirus outbreaks surfaced in Europe, I sold most of the remains at the beginning of the slide, while the market was still within 5% of its peak and just kept a few, some small positions that have been at huge losses already anyway and some larger positions in the healthcare sector (which have fared pretty well until now, I even realized some profits day-trading them in the meantime). So: just because people have had most of their money in stocks doesn't mean they necessarily still have. The beauty of stocks, especially for small private retail investors, is that they are extremely liquid, and not everyone uses a "buy-and-hold" strategy.