I ventured out from the island restaurant (a little more than a bar and grill) into the howling, 50-mph gales that had extinguished the lights in the Caribbean establishment moments before. Rain was being driven in sharp projectiles in that horizontal mode common to tropical storms, so I brought the minivan up to the door to load my five compatriots to venture home.
We waited a bit, delayed as one of the party ran back in to the café, only to emerge a few minutes later, holding a lighter, murmuring, “Just in case.” On that note, we started the drive home not only in pitch darkness but also in silence. It was obvious what each of us was thinking and suddenly one of us vocalized, “That one’s out. So is that one.” Every house along the beach road home was examined for any sign of light. None was found.
Pulling up to our beachfront lodging, our worse fears were realized. The house sat like a black coral monolith at water’s edge – appearing not at all like a warm and inviting safe harbor from the storm.
Inside, a thorough search of the premises disclosed no emergency storm supplies. Even that would not have been possible without the light of the last minute lighter. Finally we dried off some mosquito candles found on the patio. Eight of us crowded into the living room around three tiny candles. Soon, we were discussing the lessons learned.
What would we have done without the “just-in-case” lighter? How would we have found even our limited source of light? And how could we have lit them even if we had? And why wouldn’t a holiday renter have emergency provisions stored and prominently marked in a home built on an obscure split of land far from the city on an island known for power outages?
The need for taking precautions, preparing for emergencies, having “just-in-case” options, was a much discussed topic…right after the 2000 and 2008 market crashes. Not so much anymore.
I did see an interesting article on cnbc.com this morning from an advisor relating that in the last week he had met with three clients of different age groups, but all professionals, with a common bond: They each had all of their investible dollars in cash and each portfolio totaled more than $1 million.
Each couple had been frightened by the 2008 crash. Like a parent trying to convince their youngster after a fall to get right back on their bike and ride again, he was having a difficult time convincing them to put assets back into the stock market.
This illustrates a couple of lessons learned. First, while the decision to sell is difficult when it appears that the world is falling apart all around you; it is also sometimes agonizingly hard to pull the trigger and buy again when the time is right. An investment always involves a decision of when to buy and when to sell and the discipline to implement them.
Secondly, the advisor’s recommendation was to get back in but make sure it was a diversified portfolio. He said that “If you are one of the many people maintaining an uncomfortably large cash position, I offer this thought: when you burn your finger while cooking, it’s sensible to be wary of the stove. But it makes no sense to stay out of the kitchen entirely.”
I’d certainly agree; if you do something in the kitchen and get burned, don’t be afraid of the kitchen. It has to be said, “You also shouldn’t do the same thing again that caused the burn, whether in the kitchen or elsewhere.” If you burned yourself sticking your finger in a flame, lesson learned: don’t stick your finger in any flame.
I’m sure that if each of these clients had over a million dollars to invest and had gone through the crash, they probably had a pre-2008 advisor and he or she probably gave them the same counsel. Yet, after going through the crash they were afraid. Why? Because traditional advice to diversify just is not enough. They were undoubtedly scared because they had lost more than they thought they would when the markets turned against them and almost everything declined – big.
Rather than the advisor’s “kitchen” advice, I would have told them that their experience was more akin to getting wet in the rain. If you don’t want to get wet, take an umbrella. Or I could tell them that when I was a boy, I used to love to run outside barefoot, until one day I stepped on a bee. Thereafter, I always wore flip flops or tennis shoes.
Dealing with risk is not a matter of just making the decision to get back in to the market or not. It’s also doing things differently if the first experience was not a good one.
In addition to asset diversification, at Flexible Plan, we utilize active management strategies to be able to be responsive to the vagaries and volatilities of the financial markets and also diversify among different actively managed strategies. These strategically diversified portfolios of active strategies provide a many layered defense against the market crashes that so frightened these investors.
But the advisor is right on one lesson learned: If you are hammering and you hit your finger, you don’t stop hammering. And if you strip a screw using a screwdriver, you don’t stop screwing. Hmm…I’d better stop right there.
All the best,
Jerry
PS–
My market view is cautionary: Our four indicators are all bullish: Earnings, while weak in the last two weeks of earnings reporting season, were stronger than last quarter. Economic reports continue to surprise to the upside, as 16 out of 26 were better than expected last week. Interest rates were actually lower and bond prices higher in February, and investor sentiment continues to plunge into bearish territory.
Finally, March and April seasonality is actually even more positive than the combination of January and February. In fact, it’s the strongest two-month combination of the year over the last twenty years! And, of course, the trend is still “up.”
A great bullish case – so why do I say I’m cautious? First, such unanimity always scares me, as I remain a contrarian of sorts. Second, the huge 25%+ jump in volatility last week almost always leads to lower prices.
Finally, the internal market stats (advance decline issues and volume that measures the broader market conditions) have now been joined by three of the four major market indexes in demonstrating weakness. As the charts below disclose, while the Dow has been moving ever higher, all the other indexes have been charting ever-decreasing new highs. This usually signals further weakness lies ahead.
But that’s just one of many lessons learned.
Source: Bespoke Investment Group
© Flexible Plan Investments
