I watched an interesting movie the other day, titled The Big Short.  The movie was about the Housing Bubble that existed within the U.S. in the mid 2000s.  It takes a look at the landscape that was created by issuing sub prime loans, creating crafty financial products composed of underlying mortgage products, and the unraveling of it all.

The movie paints a vivid picture that shows just how bad things had to be for something no one thought was possible to happen, the housing market collapse.  People got lots of loans they could not afford, sometimes with nothing down.  Which means people bought more house than they could afford, then they got underwater so the house was worth less than they owed.  Lots of people ended up losing their homes.

Banks also created fancy investment products like Collateralized Mortgage Obligations (CMO’s).  A CMO is “A type of mortgage-backed security in which principal repayments are organized according to their maturities and into different classes based on risk. … Income received from the mortgages is passed to investors based on a predetermined set of rules, and investors receive money based on the specific slice of mortgages invested in (called a tranche)”.

The movie shows that after all the best mortgages started to dwindle in number, that subprime mortgages began to be included.  The real issue that came from having lower quality mortgages included in these new investments is that they were still being highly rated.  Investors look at ratings to make sound decisions, so if lots of those ratings are off investors are picking investments based off of bad information.

6 Key Takeaways from the Movie

1. No such thing as a safe investment.
2. Don’t go along with popular investing.
3. If an investment seems off it could be. 
4. If is sounds to complicated to invest in it is. 
5. People don't always learn from past mistakes. 
6. It is of vital importance to do your own research.  

7 Things to Consider with Your Portfolio

1. Investments can go down to zero. 
2. Look at what investments are composed of.
3. Do you know the top investments you have?
4 Is there overlap in your various investment accounts with the same investments?
5. Do you have too much exposure somewhere?
6. When you bet the whole farm you win big or lose big.
7. Too much company stock can be a bad thing, because if your company does bad so will your    investment. 

CMO Definition- Investopedia  http://www.investopedia.com/terms/c/cmo.asp#ixzz3zK2htzmj



03/08/2016 1:09pm

Savings - always a good thing - but there are times when it's tough to make the right choice. I love the suggestion for automation. It takes the emotion out :)

Comments are closed.