Devoted to understanding the basics and fundamentals of investing

Regular readers know I'm a big advocate of asset diversification.  It helps protect you from the normal cycles of the economy.  But, sometimes, diversification breaks down.  In times of great economic trauma standard correlations break down and things become more correlated with each other, with correlations approaching one.

What this means is that everything starts moving in the same direction.  The prices of all asset classes go down together with nothing moving up to offset the losses.  Examples of this would be the market crashes of 1929 and 1987.

What do you do in these instances?  Hang on.  If you sell in a panic, you lock in your losses.  You sold low what you bought higher, just the opposite of what you want.  Bottom fishers use these events as once in a lifetime opportunities to invest and make a fortune.  It requires calm nerves and lot of courage to stay the course and wait for the market to come back to you.  Fortunately today, we have mechanisms in place to shorten the duration of such disasters.

Now go out and make some money!