Saturday, March 14, 2009

What, Me Worry?

. Saturday, March 14, 2009

It is normal to panic when faced with uncertainty, and the current financial meltdown has given rise to plenty of uncertainty. But how are economic and financial experts investing their own money? As far as I know there is no systematic study on the question, but we do have a few data points:

-- Nouriel "Dr. Doom" Roubini has written many words about the financial crisis, and he's on record as saying that things will get much worse before they get better. But his investment portfolio is comprised entirely of equities, and he keeps contributing every month (ht: DePalma, via Marginal Revolution). (By the way, that entire article, on behavioral finance, is recommended reading.)

-- Atlantic econoblogger Megan McArdle is a firm believer in the efficient markets hypothesis (at least in the long run), and I recall reading (tho I can't find the post right now) that her portfolio is made up of indexed mutual funds, roughly 70% domestic and 30% foreign. McArdle also pioneered the "Don't Look!" philosophy of investing in volatile times.

-- Tyler Cowen has maintained his "buy and hold and diversify" strategy.

-- Princeton economist Burt Malkiel is 80% indexed equities, and ~ 30% foreign.

-- Greg Mankiw is a believer in the efficient markets hypothesis, at least in part: "it may be true enough".

These are only a handful, but all are heavily invested in equities relative to bonds or commodities, and all seem to profess some level of belief in the efficient markets hypothesis. Roubini, McArdle, and Cowen are not at all bullish on the economy's short-run prospects, yet their personal investment strategies have not yet changed. What does this tell us?

Well, it could mean that they are ideologically biased by a prior belief in efficient markets, and are willing to sacrifice their portfolios on the altar of that hypothesis. Or, they might be unsure of which investment strategy is best in volatile times, but they know they are unlikely to profit from short-term buying-and-selling, so they stick with their previous long-term strategies, heavily discount the short-run (since none depend on return from investments as their primary source of income), and hope their long-run strategies are sound.

I'm interested in systematic studies of how experts or academics in economics and finance invest their own money, or even more individual anecdotes. If any readers know of anything like this, I'd appreciate some pointers.


Sarah Bauerle Danzman said...

Interesting post. Although, McArdle is hardly the pioneer of the "Don't Look" philosophy. All these experts follow what I would have suggested, although I think they need to have an allocation towards bonds and I'd like to see a breakdown of their asset allocation within US stocks. Also, if you're indexing, you're not making bets on individual stocks, which may make you feel better in a bear market.

As far as your research interest - I'd suggest starting by looking at the ways in which brokerage houses invest their own money to see if there are any marked differences between their investment strategy and the strategies their clients take on.

Anonymous said...

It's interesting for me to read this because I never even thought of pondering how economic experts are holding up in financially tough times like now. I mean I've always thought I was doing pretty good despite the recession, and I've got quite enough savings and I still have my job. Not that I've got money to support me for the rest of my life or anything, that's a whole other scary thought.

What, Me Worry?




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