As we watch Greece stagger into an economic abyss it’s much like watching a slow moving train wreck. In the meantime, as you can see above,65% of 6,886 investors on this side of the pond either have no idea if their portfolio is protected or they know that they don’t have any protection at all. I am fond of saying, it’s not about the prediction, it’s all about the preparation. Think of the job like this. If there was a flood in your home, I bet you know where the water shut-off valve is located. If you were at home when water, for whatever reason, was flooding the kitchen from a bathroom upstairs you already know how to calmly keep the damage from getting worse.
When it comes to your finances, do you already have your plan in place to limit your losses? When the Dow drops 300 points as it did recently, investors become alarmed because they feel llike they aren’t in control. Here’s what we do know. It’s hardly ever the bus you see when crossing the street that could disrupt your day. It’s usually the bus you don’t see that can cause much drama, if you live to tell your story. Otherwise, you’re not in the news you are on the news.
“You only find out who is swimming naked when the tide goes out.” – Warren Buffett
We have been watching what is happening in Greece for some time now. It might appear that the US is well insulated from Greece where the total population was last recorded at 11.0 million people in 2014, according to tradingeconomics.com, but before we act as though this is business as usual, let’s recall the recent recession. According to wikipedia, “The U.S. subprime mortgage crisis was a nationwide banking emergency that coincided with the U.S. recession of December 2007 – June 2009. It was triggered by a large decline in home prices, leading to mortgage delinquencies and foreclosures and the devaluation of housing-related securities.”
On 1/2/09 USA Today reported the Standard & Poor’s 500 index fell -38.5% to close at 903.25, stating the “Markets’ fall in 2008 was worst in seven decades.” Let’s put things in even better perspective here. Among the smartest people I know is David Kelly, Ph.D., CFA, who is the Chief Global Strategist and Head of the Global Market Insights Strategy Team for J.P. Morgan Funds. Dr. Kelly was a keynote speaker before financial advisors at a 2007 conference held in San Francisco. During the question and answer period, Dr. Kelly was asked if he thought the sub-prime mortgage situation would become a genuine crisis. His thoughtful answer was he didn’t think so, as the percentage of sub-prime mortgages at the time was “about 5-6% of the mortgage pool.” As you know, the rest is history, as the world of credit default swaps and risky investments dealt a severe blow to the world in which we live. Here’s the second piece. What did we learn? Whether investors or investment advisors, what exactly did we learn from our history that might help us be better prepared for the good, the bad, and the unforeseen?
“Always be the only person who can sign your checks.” – Oprah Winfrey
Learning from history is why we have been studying the Greece situation. We have known for months that key issues would either make Greece a sideshow, which it is as of this writing, or a bearish game changer, which it could still become. Whether the factors are a bearish game changer or just a normal, healthy correction, remain to be seen. What we can see is thatthe stock market on 6/30/15 as measured by the DOW is year-to-date in negative territory, -1.14%, for 2015. In the poll here we can also see that only 23% of respondents believe their portfolio is protected. I hope you wonder what makes them respond in that way. Richard Branson, founder of Virgin Group, wrote on 2/24/14 that the best advice he can offer is to “Protect the downside.” Branson goes on to say, “When I sat down with the directors at Records, I was able to say at the absolute worst we would lose six months' worth of profits. But if it went well, we would then be able to buy a second and third plane, build another successful business and something we could be really proud of. Because I had the downside protected, they could see the logic of my decision. While they didn't welcome it with open arms, they gave me their blessing.”
You know that markets do not like uncertainty. You also know that when there is more uncertainty it is not uncommon for markets to demonstrate downward volatility. Do not be complacent at this time. Do look at the times in your past to see how you may have been able to minimize your losses.If you can learn from the past, you might not repeat it. Ask the professionals you work with to show you how your account might have held up better in the most recent recession. This way, you might be better prepared for the next time the grits hit the pan. Otherwise, you may be a statistic again. Look for active management strategies that you can put in place now where you hire professionals who are responsible for looking at your assets every single day. The question you want them to deal with is, risk on or risk off? In 2008 for example, you wanted the mechanisms in place on January 1 that would have reduced your exposure to risky assets and parked your money in cash. In 2009, in sharp contrast, you wanted professionals to double down on your exposure to bonds and stocks, as opposed to cash, as both enjoyed a very good year. After being badly burned by two equity market crashes since 2000, now is the time to prepare for another crash, that may wreak havoc on your income during your golden years. Abraham Lincoln said it best:
The information provided in this article is not intended to provide specific advice and should not be construed as a recommendation for any individual. To determine which investment may be appropriate for you, consult with your financial, tax, or legal professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and risk tolerance. The opinions expressed in this article do not reflect those of NPC. Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Investors Advantage and NPC are separate and unrelated companies.