Wednesday, 26 March 2008

Debt Kid: A Geek in Debt

Link: Debt Kid Blog

Above is a link to Debt Kid's blog. When he was 21-23 (approximately my age) he created $250,000 worth of debt through day trading. I don't know exactly what he was trading but it may have been Forex, and he must have borrowed money to invest. Before I read about Debt Kid I thought I was doing poorly.

It's very hard to know how I stand relative to others because the statistics I look at just don't seem to focus on young people. I know from the ABS (Australian Bureau of Statistics) that the average person in Australia has a net worth of about $400,000. However, the average age is 37, so what does that say about the average net worth of someone in his early twenties?

I feel really sorry for Debt Kid. He seems very honest and open. Whether he was like that all along or whether he became that way because of his losses is something I don't know.

For investments I prefer to use mutual funds and ETFs. A lot of investors talk about buying low and selling high, but my secret is that I only buy and I never sell. I also don't try to figure out whether an asset is "low" or "high." I just buy it regardless. The reason why I do this is because I don't know of any way I can know for sure what the intrinsic value of the asset is. Another important concept is diversification. Don't put all your eggs in one basket. Diversify across countries. Put some money in stocks, some in real estate. Give some money to big companies, some to individuals (see Kiva).

At the moment I have no debt. I do not borrow to invest. An argument can be made that borrowing to invest is a good idea. If the asset appreciates in value, borrowing to invest can amplify the gains from your investment. However, I get anxious over the thought of having a lender breathing down my neck as well as the threat of the asset depreciating rapidly and inducing a margin call. I am an economics student and I have heard fellow students talking about CFDs and other new investments. Based on the advice of ASIC I tend to stay away from these complex investments. I tend to be risk averse and I fear disasters, so I take enormous steps to prevent them. I have only been doing this for the last few years. Before then I was reckless and made mistakes. The mistake were mainly academic mistakes, e.g. choosing the wrong subjects. My risk aversion applies not only to my stock investments but to every part of my life. For example, I check the Euro NCAP rating of my car before buying it and I make sure I buy second hand. Even if I were to get married in the future I'd want to study my partner to make sure everything is going to be okay.

What I've realized is that being afraid can hold you back. Driving is dangerous and so risk aversion tells me to retire as quickly as possible and stay home all day so that I eliminate the risk of being in a traffic accident. I can then engage in low-risk leisure activities in my retirement like watching TV or playing chess. This will be preferable to high-risk leisure such as mountain climbing. You have about a 30 per cent chance of dying if you climb K2 (the second tallest mountain in the world).

Of course, if you're too afraid, is this a life worth living? Is it preferable to be reckless to some degree?

No comments: