An Irrationally Exuberant Call to Action

I was excited to read Robert Schiller's 3rd edition of Irrational Exuberance. He's famous for calling both the internet and real estate bubbles. Somewhat predictably - and justifiably - he's quite concerned that after tripling from its lows in 2009, the US market is again in a bubble. The book is a wonderful read on how stock markets, bond markets and real estate markets all can get into bubbles and busts. He exhaustively makes the valid case that there is no such thing as a rational market.

OK, I buy it. I've lived through three market crashes and watched the horrors of the most recent six year real estate crash. I realize that nothing is supporting the value of my house, retirement and even my dollar bills except what others perceive it to be. I also realize that there is no supposedly secure place to rest my life's savings. Like so much in life, there really aren't any guarantees. Waking up tomorrow is only a bet.

But I looked forward to Mr. Shiller's last chapter, A Call to Action. I don't like being acted upon, far preferring to take action. Here's where I hoped to learn some tips for dealing with the vagaries of markets.

Well, that wasn't to be. The Call to Action is at best some ideas for government and leaders that may soften some of the harder edges of bubbles and busts. He encourages leaders to help people through these rough times, even while he acknowledges that views that a market is over or under priced are never universally held. He says that monetary policy should "gently lean" against bubbles, but he also says the Fed probably shouldn't try to burst a bubble through aggressive tightening. This is pretty timid action.

He suggest that opinion leaders should offer stabilizing opinions. That institutions should encourage constructive trading with tools such as circuit breakers. That the public should be helped to hedge risk. The public? Helped? Hedge risk? Who can do this, and how and when?

For us, the individual investors, he rightfully suggests we not pull investments out of the market in favor of bonds, and that we shouldn't be "lulled into complacency," that things can go bad.

So the call to action is mostly little or no action, which is about how I handle busts. Minimize your risk, primarily by keeping close to a fixed allocation, by saving regularly and by responding little to bubbles and busts except to reallocate to your original plan.

I still highly recommend this book. If you believe him, you will understand why you can't take a lot for granted; you can't assume any stock, bond or house is necessarily going to rise predictably according to some formula. Instead, they can all float in time and space at various valuations, and you can only live assuming they will eventually probably go somewhere good.

And for assurance, keep up your health, relationships and interests. Even with the best of planning, you may one day find that's about all that you have.