How to Reduce the Volatility of Your Stock Portfolio, in Five Words

It's easy: don't look at the prices.

I was reading a piece about investing in farmland. The measured volatility of returns on land investments is very low compared to stocks, because you only get prices for land when you appraise it. And you don't do that very often.

Hence, my idea, which is surely worthy of a Nobel Prize, or at least a MacArthur Foundation genius grant, on how to reduce stock market volatility.

Of course, you can afford not to look only if you have not taken out a margin loan. (And that is one more reason not to take out a margin loan.)

I'm not going to hold my breath waiting for the call from Sweden.

Shadow Banking, Defined

Matt Levine gives a useful definition of "shadow banking" in a recent Bloomberg column:

Roughly speaking, "shadow banking" refers to the parts of the world that are regulated according to the capital markets view -- lots of disclosure regulation, much less capital-and-risk regulation -- but treated by their investors more according to the banking view, where the customers try not to think too hard about the risks. You can see why this would be scary: If regulators aren't worrying about the risks (it's not a bank!), and investors aren't worrying about the risks (ehhhh it's a bank!), then ... no one is worrying about the risks? That seems bad.

Levine's column is on money market funds.

Shades of Donald Rumseld, known knowns, and unknown unknowns. It's o.k. to have a financial product that is regulated. It is also o.k. to have one that is unregulated, and known to be unregulated. But beware the product that is unregulated, but thought by investors to be regulated. That is the problem with retail money market funds.

Money market fund share prices should float, even for individual investors. Stable values should be the province of regulated banks, not mutual funds.