The storm is on top of you. It’s too late to run or seek shelter. You will be pelted by driving rain or hail. Lightning will flash, followed by thunder half a thought later. The wind will shift from a strong breeze to the vortex of a jet engine sucking in all the air it can consume. Debris will fly. There will be damage.
The financial markets of the past several days mimic a violent summer thunderstorm. Storms come every year. We do not act shocked when they appear. We watch the sky, but more importantly we live in homes designed to withstand them. We do not store our most delicate possessions on the back porch.
I was asked recently if my clients had been especially worried or bothered by the latest market downturn. I replied that no, they were not. I have received very few inquiries from clients about portfolios and markets in the last few days.
Our clients have built financial plans and portfolios to withstand the inevitable storms of the markets. The portfolio can, and will, lose value in a market storm. This fact is what makes them go up over time.
If one learns nothing else about equity investing, this concept must be mastered: it is because of these steep and quick falls that equities must pay a higher return over time. The investor receives double the returns of bonds by agreeing to live with higher volatility.
Volatility is not risk. Risk is not having enough cash to pay your bills. Risk is outliving your money, or facing a financial challenge without the resources to address it. Risk is having other people depending upon you and wondering if you are going to let them down.
The volatility of markets must be respected and admired. We demonstrate our respect by holding cash sufficient to meet current needs. We show our admiration by committing assets to an investment plan that will achieve and then assure our financial independence.
In storms like the one of the moment, we show our humility by acknowledging that market storms come in a moment that no one can see until it is already happening, when the lightning and thunder are already overhead. By the time you hear the thunder it’s too late to do anything but get soaked.
My local running club has a listserv on which members will post various things of...