Here's a brief but excellent overview of investing, global markets, and risk management from Mohamed El-Erian, who manages the $30+ billion Harvard University endowment. One highlight where El-Erian makes a point we've been wanting to make ourselves:
Q: The U.S. market has been doing well this year, the S&P is over 7 percent, the Dow has hit some new highs. Is there anything we need to be wary of?
A: Yes. There's the increasing risk of sudden, sharp pullbacks. This occurred in May-June of last year, and in late February of this year. The corrections were technical in nature. We're likely to see more of them going forward as a growing number of hedge funds and other "fast money" investors rely on what I call "just-in-time" risk management approaches.
Instead of taking chips off the table gradually as prices go up, there are now all these sophisticated derivative-based instruments that encourage investors to "wait for the market turn." That's why you get S&P falling 4 percent in one day when nothing has really happened.
And the declines are inevitably broad-based and seemingly indiscriminate. Individual investors need to try to remain calm in order to minimize the risk of selling at the wrong time - instead try to have the right mindset, assess the situation, and be able to weather it out as long as the underlying economics remain sound. Because going forward, these technical selloffs will likely be a more frequent fact of life in the market.
That's important stuff. We encourage you to read the whole thing.
Marcia Vickers, "Global guru: The head of Harvard's $30 billion endowment talks about investing, the market, and the global economy," Fortune, May 31, 2007