“The Scream” by Edvard Munch. Source: National Gallery of Norway
Scary things can hurt us, but they aren’t very common: shark attacks or terrorism or radiation poisoning. We read news stories about them and we get worried. Dangerous things are things we tend to ignore but do long-term damage more often that you think: like avoiding your annual physical, or working on our budgets, or changing the oil. We underestimate these risks because dealing with them means we have to do something we don’t like.
In finance, there are lots of scary things: trade wars, recessions, politics, Fed policy. Any one of these, or several of them at once, can cause a market correction of 5 to 10%, or even a bear market of 25 to 50%. We’ve lived through a couple of bear markets over the past 20 years, and a bond bear market 25 years ago. They’re frightening.
But if our finances are structured properly, these storms should leave us relatively unscathed. Unless you have to sell your securities during a downturn, the losses that volatile markets cause are temporary. And you can avoid selling during a bear market by having the right investment structure, with enough cash, short-term bonds, and income-producing investments to meet your day-to-day needs.
But financially dangerous things can result in permanent losses: not having an estate plan, or not contributing to an IRA or 401(k), or being underinsured. These are items that are under our control, but we don’t like to think about them. They’re not glamorous. No one’s going to make a movie starring Madonna about the irresistible attraction of a balanced budget.
Photo: Chris Weger. Source: Wikipedia
There are truly scary things in the markets: like using your emotions as a guide, or leveraging a concentrated portfolio. If you bought $10,000 of Berkshire Hathaway 30 years ago you’d have $70,000 today. But if you borrowed half your shares on margin and bought $20,000, you would have nothing today, because your shares would have been called away when Berkshire shares fell by 50% in the late ‘90s. That’s truly dangerous.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”