Re: Stock Market
A little late to the party but here are my views, as generally unconventional as they may be:
One issue with the downgrade was that S&P spoke out of turn. If memory serves, they said a downgrade was likely unless the debt package was at least X dollars. When the package was less than X dollars, S&P had to make a difficult choice: (1) downgrade and watch the market tumble, or (2) lose credibility. We know which way that went.
I believe that diversification is just safe game theory - but essentially amounts to making a choice by not making choices. Diversification is a nice way of saying I don't know how this thing works, but I'm going to throw money at it anyway and see what sticks - a safe way of spreading out wins and losses, by being a jack of all trades but master of none.
The advice someone gives you should be weighed against their vested interest in the outcome. Stockbrokers in bad markets give the same advice as lawyers in bad cases - "wait it out, this is just a minor setback, we're in it for the long-run, etc." Their vested interest, frankly, is in you continuing to pay for the service. I've yet to hear a lawyer say (at least audibly) that a case was indefensible, or a stockbroker suggest selling unless it's at the "sell high" end where everyone stands to walk away with a chunk of change. I think a lot of it also depends on the value of the assets your broker handles - the top 5% of investors (by wealth) are seldom given the same advice the other 95%.
And when it comes to "long-run" investing, I know a lot of people who are "in it for the long haul" and watch the markets obsessively (as in every five minutes). If you're in it for the long-haul, what does it matter? I believe that there is no such thing in practice - that the "long-run" people chase is nothing more than what should be a series of wise short-run moves.
I'm with SummerFun and the cellar safe Full-O-Cash idea. I believe that in real terms your wealth is relative to everyone else's. Otherwise, the numbers are meaningless. For instance, Warren Buffet isn't wealthy because of how much money he has; he is wealthy because of how much money he has compared to everyone else. So when you keep cash positions while everyone else is losing their portfolio, you actually become wealthier in real terms. This historically reflects a logical fallacy in our finance fundamentals that most recently backfired around 2008 - companies had always been looked down on for having a lot of cash on their books. Investors would ask why they weren't investing that cash, missing growth opportunities, etc. Those companies are still around now, going strong, and management is highly regarded for their genius.
It really comes back to what your true goal of investing is - to make 10% a year, or to not lose your life savings? On a basic level those are conflicting goals, and therein lies the rub.
