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Space Racer
09-26-2008, 09:35 PM
Market Worries

1. Consider this:
Let’s say:
You have \$1500 in the bank. You have 2 kids.
You and your spouse look forward to
the following expenses: back-to-school,
time, and income taxes.

You drive a truck with two gas tanks. The front one
holds 35 gallons. The back one holds 30 gallons.
You have a switch on the dash so that when the front
tank runs out you can switch gas lines and keep getting
gas as you drive down the road.

You refill your front tank when you get down to about 5 gallons.
That’s when the light comes on.

You drive about 30 miles a day. You get 15 miles/gallon.
That’s two gallons of gas per day, right?

You buy gas for \$3 a gallon and have been for a long time.
You buy 30 gallons at a time, because at 2 gal/day, you get
about 2 weeks worth of gas, and there is no need to fill
the back tank. So you your back tank is empty. You
could fill it, but that takes forever and there is no need.

You have an EPA certified 5,000 gallon gas tank buried
in your back yard and a decent gas pump.

The price of gas goes up to 4 dollars a gallon. You continue
to buy gas, but you don’t always fill up your tank. The
price stays at \$4 for several months.

Some authority announces there is a new source of
gas, and there is so much of it that the price will probably
drop to \$2/gal. But this new supply will only last for
about 6 months. That 2\$ price will probably last for a
month or so, then creep back up to \$4 over the following
5 months.

Over a period of a few weeks,
the price of gas drops to \$2/gal.

What do you do?

Do you
Calculate how much your tank of gas is worth.
Go to the gas station and fill up both tanks.

Do you
Complain that the new net value of the gas in your
tank is half what it was at \$4/gal.
Talk to the spouse about how much extra
gas you can afford to buy and store in the

Do you
Go to the news media and complain that the value
of the gas in your tank has dropped.
Figure out how to cut back on expenses so you
can afford to buy more gas.

Do you
Continue to worry about the price of gas.
Decide to buy as much gas as you can, in
spite of the fact that you will have to make
other critical sacrifices, even though you
and your family will surely suffer in the
short term.

2. Consider this:

Let’s say you have \$30,000 in mutual funds.
Your investment goes up to \$40,000 in value.
Then it drops to \$20,000.

What do you do?

Do you
Calculate how much your portfolio is worth.

Do you
Complain that the new net value of the stocks in your
portfolio is half what it was at \$40,000.
Talk to the spouse about how much extra
stock you can afford to buy and store in the
portfolio.

Do you
Go to the news media and complain that the value
of the stock in your portfolio has dropped.
Figure out how to cut back on expenses so you
can afford to buy more stock.

Do you
Continue to worry about the price of stocks.
Decide to buy as much mutual fund stock
as you can, in spite of the fact that you will
have to make other critical sacrifices, even
though you and your family will surely
suffer in the short term.

The moral of the allegory:
Look at your portfolio the same as you look at