Most of us know the story: It was 11:40 P.M. on April 14, 1912. Lookout Frederick Fleet spotted an iceberg immediately ahead of the Titanic and alerted the bridge. First Officer William Murdoch ordered the ship to be steered around the obstacle and the engines to be put in reverse, but it was too late.1. The great “unsinkable” ship was doomed. Of the 2,224 passengers and crew, only 705 survived. This tragedy not only sent the world into shock, but into outrage at the many overlooked technicalities that could have avoided the loss of life.
And more recently, this story: It was September 16, 2008, and the failures of the largest financial institutions in the United States sent the world into crisis. Bank after bank was exposed by their bad debt in subprime loan and credit default swaps worldwide. Companies of all sizes - started by hard working American people - were sent into bankruptcy because of their insolvent lenders. Entire countries began to unravel…literally. Every day moderate investors across the world lost trillions of dollars. There was no safe place. No one saw this catastrophe coming. And everyone was outraged at the greed of our banks and their simple neglect to stay safe.
These two pieces of history are very far apart in time and subject matter, but they share so many commonalities. In fact, if you look at any of the major economic or financial downturns we have experienced; the details would align very closely to the story of the RMS Titanic. The more you know about these historical events, the more you will be able to recognize the parallels. The fate of the Titanic was a result of overconfidence, greed, and regulation and technical failures. I don’t have to tell you what the fate of the Great Recession, the Dot Com Bust, or even the Great Depression hinged upon.
The troubling thing is how quickly we forget. It was not even 8 years ago that the world was profoundly shaken by greed, overconfidence, and neglect. We have yet to fully recover – and not even begun to recover in some areas. The U.S. financial markets hit their all time high this year. Was this growth driven by our economy? If it was, why are there so many companies that have not experienced market growth but have the same or better internal growth rates and futuristic outlooks? Historically, the market has been forward-looking. Is this growth then an indication of better days? I hope so, but my hope is dimmed due to the strong possibility of future increase of regulations, expenses, and taxes companies will face. So what is causing the market to grow? Remember that the Federal Reserve has pumped money into these markets. Could it be that? Or could it be greed?
I don’t know…I wish I did, but I don’t. What I do know is that there is a lot more risk in the market today than there was in March 6, 2009, when Dow Jones Industrial Average was at 6469. 2
The problem we face as advisors is that we have to keep investing to be able to reach the individual life and retirement goals set forth, as well as keep up with inflation. So do we want to keep our eyes on the original destination or get off at the iceberg? You shouldn’t put all your money in one basket—in this case, the U.S. equity market… though it’s been a good run since March of 2009, you should bear in mind the U.S. equity market doesn’t always perform this way.
A couple of months ago, we had a client that said we were like watching paint dry. I consider that a great compliment. As a risk manager, we are in the business of first preserving what you have worked so hard to get, then growing it—not the other way around. I would much rather float along in the lifeboat until we reach our goals than try get there full steam ahead and go down with the ship. Wouldn’t you?
*Diversity Disclosure: Diversification does not guarantee a profit or protect against a loss.
- Vanguard 500 Index (VFINX)