March 20, 2020
"Stability breeds instability" the economist Hyman Minsky once observed. The past six months back him up. As the stock market climbed steadily upward for over a decade, obscuring risks investors were taking without compensation, complacency set in. And once instability was triggered, many investors are finding challenges they didn't anticipate. In a down market, investing feels insecure, and it certainly feels less fun.
But when instability means "stock markets going lower," you are not in a riskier position. You are in a *safer* position when looking forward, assuming you do not need to draw too much cash from your portfolio. Stock markets going down create safety. Bond markets now going up create risk.
I know this sounds weird. But the error that investors almost always make is they drive looking in the rear view mirror. You have to drive looking through the front windshield. And securities priced lower, especially relative to value, mean less risk.
I'm not worried about the financial world today, at least for our clients. My assumption is that we'll enter a recession and equity markets could slide down from here. But I don't know that (1), and the risk protection system is in place. We have three levels of internal control checks on every account we manage to verify risk levels, which is more than any firm I have ever seen in the industry (it's interesting that we can do that while charging substantially less than almost everyone - it tells you something about the industry).
All of us at One Day In July spend time discussing ways to emotionally detach from markets, while staying emotionally connected to our clients. We know that market emotional detachment is both valuable and rare, and we like both of those adjectives, particularly when combined. But if you are worried, call your Advisor here and have a discussion. It's natural, and a significant part of our job is offsetting fear.
I am concerned about media consumption. It's a factor we as Advisors cannot control, and I believe that it is, by far, the biggest risk most people face. Investors think the largest financial risk is Coronavirus, or overinflated valuation of American securities, or a recession. But my belief is media consumption, the short-term anxieties it spawns, and the fear or greed it induces will do more over time to depress returns.
(1) Generally, a year after an outbreak the stock market has risen substantially. But this has zero predictive value. See
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