The High Gold Prices Are Good For The Mining Company, Because They Now Get More For Their Raw Gold

Category: Finance, Personal Finance.

"Cultural Creatives" are people who care intensely about the environment and our role in it. We tend to look for cooperative solutions to problems.

We care about relationships and spiritual development. We would prefer to cooperate with others than to compete with them. We care about our psychological development. We would be willing to pay more in taxes if those taxes were to help improve the human and natural environment. We care about social justice. The financial media tends to put its emphasis on finding hot stock tips and consumerism, valuing competition over cooperation, and valuing profit over social responsibility. It is really no wonder that culturally creative people can feel alienated from the world of money and investing as it is portrayed in the media.

However, there is a natural home for culturally creative people who want to succeed with their investments. Nobel prize winning economist Harry Markowitz is the originator of Modern Portfolio Theory. The values that we hold are actually ideal for successful investing based on a powerful model known as Modern Portfolio Theory. Modern Portfolio Theory looks at the market as a whole rather than focusing on individual stocks. More volatile stocks are equated with risk. Individual investments are analyzed statistically, looking at their long- term return rate and their short- term volatility. The goal is to identify your acceptable level of risk tolerance, and then to create a portfolio that matches that level of risk.

Markowitz made some remarkably powerful observations about investing. DIVERSIFICATION ADDS STABILITY TO YOUR PORTFOLIO. He looked beyond the picking of individual stocks, which previously had dominated most people's thinking about investing, and considered the issue of creating overall portfolios that are efficient in terms of generating maximum return for a given degree of risk. For a simplified, let, hypothetical example's say that high gold prices are good for a gold mining company, but bad for a gold jewelry manufacturer. Markowitz noted that certain stocks have an inverse correlation to each other in terms of price. The high gold prices are good for the mining company, because they now get more for their raw gold. As an investor, you will attain better diversification if you invest in a gold mining company and a gold jewelry company than if you invest in two gold mining companies or two gold jewelry companies.

The high price of gold is bad for the jewelry company though, because now they need to pay more for the raw material that their product is made of, cutting into their profits. This is because the gold mining company and gold jewelry company have a low correlation to each other. Markowitz teaches us that a portfolio, properly invested with good diversification, will weather changes over the long haul better than a portfolio where there is limited diversification. When one goes down, the other tends to go up and visa versa. The beauty of this approach for Cultural Creatives, is that it gives us a way to invest which is not a competitive struggle. Now you can turn your attention to the things that you really care about: your family, your work and your passions.

By finding your risk tolerance at any given stage of your life, and assigning an appropriate diversified asset allocation for your investments, you have now greatly simplified the whole process of investing. Cultural Creatives have an investing advantage: we are involved in our own psychological development. We turn the focus to our own values and goals, working to align our present behavior with the outcomes we envision for our lives. The Modern Portfolio Theory approach allows us to focus on our own wealth building behavior rather than on the competitive marketplace. Now, wealth building becomes a centering exercise- an aspect of our lives where we become aware of what we want and need, and invest according to our vision of our own lives.