Worst Case Scenario

WindshieldI roughly follow what happens on the stock market, and in particular what’s happening at the Stockholm stock exchange. A few months ago a pharma company made public a failed study on a possible medication for diabetes, and lost about 80% of its share price in a few hours.

I read that some people were 100% invested in this stock (or more; through loans with the stock as security). It made me think.

What would happen to you if you lost 80% of the gross value of your investments – including your apartment or house – overnight? How diversified are you? How big are the risks?

If you are loan free it would be bad, but you could probably ride it out. As long as you don’t need the money right now it’s normally possible to rearrange life so as to get by.

Most people I know are not loan free though. They either have student loans or an apartment/house loan (or commonly both).

I don’t invest in the pharma industry (nor in tobacco, avionics, films, media, forex, anything I don’t understand, and a few others) so I was spared this time.

Even though this particular company was an obvious gamble, there is the possibility of my stocks losing 80% – or maybe just 30% – of their share price overnight.

Just look at what happened to bank stocks during the recent bank crisis.

Almost all of my money is stashed away at the Stockholm stock exchange and seeing that I have both some upcoming taxes and student loans to pay, you could say that I’m potentially traveling on borrowed time.

Still, seeing that stocks have historically returned about 11% over time – compared to current interest rates at just above 2% – it seems like a gamble worth doing. On top of that I have hopefully chosen my few stocks with care. I’ve been thinking about diversifying more, but I don’t want to buy a stock which I haven’t researched thoroughly.

And if worst comes to worst I guess I’d just have to find a job real quick. Or maybe I could hide in some far away country in Latin America. :-)

Ah, life is so much better since I stopped worrying about money. Money is something ephemeral; you have it, and you lose it. Experiences and skills are worth so much more than mere money.

Cheers,

Daniel

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