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Originally Posted by Schneed10
We're getting off-base here because we're starting to talk economy, but I can't let these statements go without addressing them.
The mortgage backed securities were essentially the same thing. They created investments which were insanely leveraged, and were dependent upon the continued growth in real estate prices in order to support the fundamentals. As soon as the prices dropped, you had an asset that couldn't be unloaded, and you were stuck riding it down.
A 20% profit would be nice if you had a debt to equity ratio of about 1.0. But taking out a $400K loan when you only have $50 - $100K in the bank is foolish because of the risk you face. You have to liquidate all of your personal assets just to cover the cost of ownership. Not intelligent assessment of business risk.
There's calculated risk, and then there's foolish risk. Nobody advises anybody to put 100% of their savings in one stock, it's a big risk but that doesn't make it a wise one. A smart risk might be flipping houses to the extent you have cash to cover the cost of the investment. Or a smart risk might be to put your money in a diversified set of aggressive investments. But leveraging yourself beyond your ability to cover the debt is never smart, it's business 101.
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Sure, point taken. Risk is relative & many were too risky, which in turn hurt the market even for those that weren't very risky at all but simply wanted their properties to appreciate, sell their house, etc.
As for diversified portfolios, Michael Vick certainly was on the cutting edge in diversifying his!
