To all:
A story that happened earlier this week.
My little sister, age 20, decided back when only to go to college part time, so mom (for whatever reason) decided to give her $40K that would have been spent on her college education. Lucky sister, huh.
Anyway, that's not the point of the story. My mom gave it all to her in PFE stock. My sister knows diddily squat about the market. I was talking to her Monday after talking to another sister of mine who once upon a time majored in Finance in college - she's the permabull of my family and I'm the permabear. I told Finance sister that the market was going to crash and she said "I know market is going to crash." She's actually shifting stock into Cash (shocks me) although she has oodles of money in KO and is just going to let it sit there. (She says market crash will come in December, and may consider buying protective KO puts then, but for now, why bother?)
Anyway, baby sister hears this and panics and I talk to her on the phone... try telling a 20 year old (who is completely ignorant about the market) what a put is or how to manage risk... all she knows is that she started with $40,000. She took $10,000 out to pay for college and living expenses this year. Her balance is now $42,000. So she's made money even though she took money away. When I said that the market might crash and she may lose half of what she has, she got really scared and said "but this is my life savings..." As if the market is as safe as a bank, and while you may make more some days than others, you'll never lose money...
I couldn't justify to her buying puts to protect the stock because she may lose everything on the puts, she pays full service commissions, and the entire family will get mad if I squander someone else's money. But I did convince her that if she was going to sell stock in a couple months to pay for the upcoming school year, she should probably sell enough to last the whole school year rather than sell just enough for the first semester... she did grasp the concept that she reduced her risk that way, and also reduced the reward.
Why is it that I feel that my sister is much more like the typical investor in this country?
-Mike |
