As we eagerly await the close of 2020, there are hardly enough fingers to count the bizarre and taxing events endured over the last 11 months. Whether a presidential election, stock market crash, stock market revival, political unrest, social unrest, hurricanes, wildfires, murder hornets, oh, and a global pandemic, most sit wondering what additional unsettling surprises can occur over the next three weeks, just to add insult to injury.
Every year (as Bo wrote here) there is some major event that can endanger our investment plan. We start off with good intentions to stick with that plan, but as more bad news unfolds, four little words tend to seep into our minds:
“This time is different.”
This qualifying statement leads us to believe that the severity of such events will change life as we know it forever. To ease our concerns, we try to get ahead of the consequences; believing we can successfully (usually, after the fact) time and outsmart the financial markets in preparation of what might (or might not) happen. To no avail, these decisions typically leave a mortifying stain on our portfolios at the expense of our fears.
Creating wealth is difficult, but maintaining wealth is a whole other game that requires an entirely different skillset. If we look to the lessons of history, there is an invaluable roadmap on how families preserved their wealth during the darkest of times. When those times truly were different.
Below are two takeaways that I believe are foundational to thrive economically during any circumstance.
1. Be Prepared and Diversify Assets: In Barton Biggs’ book, Wealth War & Wisdom, Biggs provides a humbling account of the horrors of World War II and the effect on the participating countries’ economies, financial markets and wealth. During this time, many European families concentrated their wealth within their estate alone. As battles waged across the continent, these homes were destroyed, leaving many families with nothing. However, those that were able to maintain their wealth after the war had two things in common: preparation and diversified assets.
These families saw the importance of looking ahead, asking “what if?” and organizing their wealth to thrive regardless of the situation. They had the foresight to spread their wealth into productive assets such as jewelry (i.e., gold and silver) and other land outside of their estate that were independent of conjugated risks. Today, we identify and react to these risks via financial planning and diversifying assets in non-correlated asset classes balanced to the economy.
2. Trust in the Human Spirit: September 11, 2001 provides a recent example of how we thrive as human beings no matter how challenging the times. I don’t have to write any examples of what we experienced that day, but I think it is safe to say that time stood still. In response to the onslaught of horrific events, the stock market mirrored this fear, dropping 14% in a single day, leading to the closing of the stock market for an entire week. However, America picked herself up, dusted off the ashes, targeted and dealt with those responsible and came back stronger than before. The stock market recovered its losses only a month later and closed out the year 5.5% higher than the market close on September 10th.
Financial writer Morgan Housel points out that history is the study of surprising and unexpected events. Isn’t it ironic that we look to history (surprising and unexpected) to guide us looking forward? As if there is some correlation we can draw upon to uncover the outcome of future events?
We will never be able to fully anticipate the next great disaster. What we can do is plan for the potential risks and properly diversify our assets to fortify our wealth. This will give us one less reason to gamble on the outcomes of unexpected events and instead, trust that our economy will continue its resiliency as it has during the darkest of times. In turn, the financial markets will continue to honor this sentiment and allow us to reap the benefits in our portfolio time and time again.
If you need help participating in the ever-growing markets in uncertain times, give us a call. We will leave a light on for you.