DIS and DAT-Hurricane Season- August 2012
Our periodic communication that reminds you to ask, “Should I react to those headlines?”
“A stock market decline is as routine as a January blizzard in Colorado. If you're prepared, it can't hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.” Peter Lynch
“You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets.” Peter Lynch
What about the Fiscal Cliff? What about Europe? Who will win the election?
No one actually knows what the eventual effect of the three headline events above will have on your investments. This is the reason investment decisions involve risk and investments have a possibility of gain as well as loss. Yet, as you will see, we recommend being wary of taking action based on emotionally charged headlines. Our reasoning is that while a nicely written headline tends to move you toward action, however, this doesn’t mean that it is best to take that action. While reading financial headlines, we believe being mindful that you are unique is important. Each person’s circumstances are unique and a broad headline or article cannot possibly cover every person’s circumstances.
As we come to the peak of hurricane season, we thought it useful to consider how preparation for a hurricane and an uncertain outcome of a market event may be similar. In that way we can turn a situation in which we are affected by events of which we have no control, into a series of questions that will help us to take better action. Questions such as: Am I ready for the hurricane or event? What if it does not happen? Should I rely on my ability to predict the strength, location, and timing of the storm, be it investment or hurricane related?
From our experience preparing for a hurricane during a hurricane is not very useful, i.e., it’s too late. When looking back at the history of hurricanes we find various outcomes. Sometimes the storm dissipates before hitting land. In such a case, one may experience feelings of aggravation at having prepared for it. This may be similar to a feeling “wasting” money on insurance premiums in the event that no claims arise. Sometimes the storm is small in which case, here in Louisiana, we have what is known as a “hurricane party.” Sometimes the hurricane unexpectedly changes directions and then it becomes “someone else’s problem”. And, as we all know, sometimes they can be devastating, life altering events. In conclusion, we believe that to live as though there will never be another storm would be imprudent.
When preparing for an “investment storm” we recommend you consider the following ten pieces of advice:
- Maintain a low withdrawal rate. In terms of risk related to running out of money, the lower the withdrawal rate, the better. Other risks such as poor health are also reason to keep your withdrawals to a minimum.
- Maintain an appropriate allocation towards high quality fixed maturity investments. Consider years of potential withdrawals as a starting point in these discussions. For those of you who are clients, potential financial storms are the reasoning behind our questions to you. (Fixed maturity investments involve risk also—see point five.)
- Maintain low debt levels. High debt levels can inhibit financial flexibility, or the ability to adjust to unforeseen circumstances.
- Maintain work skills and work contacts. Some of our clients have reported that work has allowed them to realize that they have more control over their finances than they previously thought. During the financial storms it can feel as though you have no control and are subject only to outside influences.
- Do not maintain an allocation to one single asset or asset class. At worst, this could unexpectedly wipe you out, given other-than-perfect conditions. Even without wiping you out, it may inhibit the financial flexibility you do have in making adjustments. George Hebert remarked, “The mouse that hath but one hole is quickly taken.”
- Practice an investment philosophy which involves patience and risk consideration before potential returns.
- Practice an investment philosophy which is focused on valuation, instead of the popularity of your investments.
- Do not rely on your or someone else’s ability to predict the near term future events for the overall success of your finances. We have found that inevitably some “guru” will be parading around after the storm claiming to be able to predict all future market events. Some investors then play the game of predict the predictor. We have found that to be difficult, if not impossible. In other words, we believe it to be highly entertaining, but not profitable.
- Do not allow the basis of your investment decision to be based solely on past price charts. It doesn’t matter whether one’s response from chart glaring is “Hey that’s dropped a lot, therefore I need to buy/sell”, or “Hey that investment is on a run, therefore I need to buy/sell”, the compliance saying springs to our mind, “Past performance is not indicative of future results.”
Please remember, these tips do not imply a guarantee you will get through every storm unharmed. We believe it prudent to warn that this is not a forecast of an investment storm hitting but rather our thoughts on how to improve the odds of financial survival in a world in which we do not know the timing, strength, or location of the next investment storm. All investors share these uncertainties.
Hopefully you now have a better understanding of the meaning behind Peter Lynch’s quotes above and that, if you are prepared, you may just find opportunity in the financial storms. Discovering this type of opportunity may lead one to sing Eddie Rabbit’s “I love a Rainy Night” after the financial hurricane has passed. In order to even be able to consider taking advantages of opportunities from the “investment storms” one must also not find themselves without liquidity.
We appreciate that you have taken the time to read our piece. If you have any questions feel free to email or call us. For those of you along the gulf coast, let this also serve as our reminder to check hurricane supplies and preparation plans!
See you next time.
Please remember to contact Diversified Investment Strategies, LLC dba Advisor.Investments, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct that Diversified Investment Strategies, LLC DBA Advisor.Investments to effect any specific transactions for your account. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available upon request.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Diversified Investment Strategies, LLC dba Advisor.Investments), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Diversified Investment Strategies, LLC dba Advisor.Investments. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Diversified Investment Strategies, LLC DBA Advisor.Investments is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. If you are a Diversified Investment Strategies, LLC dba Advisor. Investments client, please remember to contact Diversified Investment Strategies, LLC dba Advisor.Investments, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Diversified Investment Strategies, LLC dba Advisor.Investments current written disclosure statement discussing our advisory services and fees is available upon request.
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