Photo: Clem Onojeghuo. Source: Life of Pix.
I do. It’s a kind of insurance. I keep a small, compact umbrella folded up in a corner of my briefcase. That way, if I’m caught up in an unexpected downpour, I have something to fend off the worst of the weather. A couple times every year I’m thankful I have something that helps me get where I want to go without getting soaked.
The idea of carrying emergency supplies came to me (like many good ideas) from my mother. When my brothers and I were beginning to drive in the Minnesota winters, she insisted we keep a small kit of roadside aids in the trunk of the car – a warm hat, gloves, matches, a flashlight, all in a coffee can. That way, if we slid off the road during a blizzard, we could stay with the car until help arrived.
Of course, you can go crazy carrying extra goods around. It’s like having too much insurance. It’s nice if things go wrong, but the cost and bulkiness of having goods on hand for every contingency – food, clothes, a sleeping bag, maps, extra batteries, a small stove, a heavy coat, boots, etc. – can be overwhelming. Eventually, you’re carrying a small apartment with you. All that stuff can make it impossible to fit anything else in your trunk, something you would normally put there, like groceries or luggage for a trip.
I think about insurance when we assemble investment portfolios, especially portfolios that need funds on a regular basis. It makes sense to have some assets that remain stable when markets are volatile – assets like cash or liquid government bonds. These assets never provide the best long-term returns. They’re a drag on performance during good years, and we’ll never be able to brag about them. But they provide insurance when markets get crazy, when people act like the world is about to end. The world has a funny way of not ending, but sometimes we need a little money in the meantime. We don’t want to be forced into selling something when the market’s panicking. That turns temporary market fluctuations into permanent investment losses.
Quarterly S&P 500 returns, 1956-2018. Don’t sell on the left side. Source: Bloomberg.
Unexpected stuff happens, in the markets and in our lives. Staying dry and staying solvent means carrying a few extra items, having a little insurance on hand. It may not maximize our returns, but it gives us peace-of-mind. And it keeps us safe and dry.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”