Benjamin Franklin Was Right
“An ounce of prevention is worth a pound of cure.” ~Benjamin Franklin
Most people are reactive, not proactive. Most people won’t worry about their health until something starts to go wrong. Most people won’t work on their marriages until they start to crumble. Most people won’t think about their cars until they malfunction. If something is going along and not bothering us, we throw a blind eye to it. The same applies to our investments. Most people will not think about their investments until they start losing money.
Even worse, in almost all of these life-impacting situations, we usually get some warning signals along the way. It is rare that our biggest troubles come completely out of the blue. Yet mostly we are still reactive and ignore the warnings until we are in a crisis. This is human nature.
When it comes to investments (our area of expertise), markets have been sending warning signals all year. We’ve written many articles this year urging caution as we near the end of this economic cycle. We are not alone in our concern. Many notable investors including David Tepper, Paul Singer, Jeff Gundlach, Larry Fink, and Bill Gross have said it’s time to lower risk. But mostly they are ignored.
Nobody seems to care because the stock market is up and interest rates are still low. Hardly anyone has the slightest idea how much exposure they might have if the market were to crash or interest rates were to increase. Why worry about something that is not causing pain yet?
There are reasons to care. When it comes to your money, your livelihood is at stake. We’re always just a few bad decisions away from serious financial pain. Let us give a few examples:
- You think you have made your “retirement number” this year because markets are at a peak and your nest egg looks big. Problem is, new market highs are meaningless unless you position yourself to retain most of the gains. Imagine you retire; the stock market craters 40% and just stays there. You can’t find a new job, because you are too old. Yet your savings are depleted and you live your retirement in penury. If you don’t think this can happen, look at a chart of the Nikkei 225. Markets don’t always bounce back.
- You might think you are conservative and have most of your assets in fixed income. Interest rates rise or inflation hits and the value of your savings dives. You can’t sell the bonds, because you would take a major loss. Yet the interest you receive doesn’t nearly cover the value you are losing to inflation. If you don’t think this can happen, just look at a chart of 10 Year Treasury Rates through the 1970s.
Whenever we perform portfolio reviews for anyone with a more proactive mindset, we usually find a mixture of stocks, bonds, and real estate. Most people think they are well diversified and protected from risk because they own all three of these asset classes. Yet they fail to remember that in a time of crisis, all of these asset classes lose value at the same time, just like in 2008. In the next serious crisis, all of these asset classes will lose value again. Only this time, there will be very little that the Fed or any central bank can do, because the limits of monetary policy have already been reached.
As we near the end of this economic cycle, now is the right time to be proactive. You cannot protect your assets after the fact. Contact us if you want to learn more about how to prevent major damage to your investments in the next market crash. We will run an independent stress test from the big data analytics firm HiddenLevers that will show you how your portfolio is likely to perform in different economic scenarios and give you a very clear idea of the risks you are taking. We can also show you how an ounce of prevention can make all the difference when it really counts. When it comes to investing Ben Franklin was right: An ounce of prevention is worth a pound of cure.