In the past few weeks, we have experienced some frightening market conditions. Friend & author Doug Lennick says that our brains when confronting direct risk cannot tell the difference between a bear in the woods or a bear market, and hence we react with fight or flee (usually flee). Financial advisors will attest to the personal reaction that many clients have had in this recent turbulence.
But hold on… how real is this risk?
William Bernstein, investment manager and author of several books on investment and financial history would call our recent market turbulence a “shallow risk.”
He describes a shallow risk as something you are likely to recover from and a deep risk as a “permanent loss of capital.” Although there are several ways to produce a permanent loss of capital, I would like to define the two that lead from a shallow risk to a “riptide.”
If you combine the wisdom of both Lennick and Bernstein, you can understand that in a sharply down market event (remember, this is a shallow risk) you sell and go to cash (or equivalents) which makes your temporary risk permanent. Next you go on the hunt for the safest of investments and lock them in for a long time – at 2% or less!
Now you are in the riptide! How can you say that? How can I be in a riptide if I feel so safe? Because the biggest Deep Risk is “not keeping up” with purchasing power, i.e. inflation.
This becomes a second step in permanent loss of capital. And like a real ocean riptide you often don’t notice it until its too late. And you can’t save yourself by swimming against it – you have to get out of it.
So how do you get out of a Financial Riptide?
Step one: see an advisor that has successfully navigated troubled financial water and can help be the voice of reason when the markets are turbulent.
Step two: make sure your financial or retirement plan has 2 components: a) sound portfolio construction, and b) an income strategy for retirement.