In 1999, my neighborhood housed a nice, but eccentric family who was convinced the world was going to end at the stroke of midnight December 31, 1999 or Y-2K. They did extensive research and calculated that technology to keep our lights on, gas pumped, food stocked, and computers operating couldn’t possibly sustain January 1, 2000. They made this decision based on partial information about how computers would need to adapt, and how global systems need to talk to each other. Consequently they stacked their garage with food and sold emergencies supplies for nearly 9 months. Their entire lives adjusted to this certainty – to the point of leaving jobs and scaring some people half to death. By December they couldn’t shut their garage door. It looked like a yawning, gaping smile in front of their home, much to the dismay of those around them. I asked them why they were so certain and they never said anything like “God told me” such as Noah heard (which is hard to argue with, except I would have wished He had also warned me about Y-2K.) It was a compilation of information and worrisome acquaintances and meetings they attended about the threat of technology on our earth. Needless to say in 2000 they did not need to grocery shop for awhile.
I’m writing this because our volatile markets and our economy are uncertain. So we should take reasonable precautions. However we shouldn’t lose sight of the larger picture and the fact that the media spouts only partial information depending on which station you are tuned to. Some in the media blame the volatility on the European economy including Greece and other countries overwhelmed with locked-in entitlement programs and no money to fund them. (I happen to view this as a serious warning Americans should recognize and prevent asap.) Some in the media blame our expanding government bailouts for the skittish markets. Some put the blame solely on politics, reasoning that if we all just “get along” the economy would straighten itself out. Some may even blame global warming. Everyday, since I am a financial planner, I read a “reason” for a change in the market. Most of the time, there is more than one. One indicator happens to outweigh another depending upon what is on the minds of investors. As we saw recently, trades errors can trigger a tsunami that has nothing to do with anything but a glitch.
I am attaching to this blog an article that describes in layman’s terms how fiscal spending and debt play into the long term economic health of our nation. Why? Because it is good to know, and there are slivers of answers in this article. Now, after reading this, some might reason they should put their money under the mattress or in a bank or gold. Others may think it is great to move in the other direction, believing the economy will recover sooner than later and this is an opportune time to take chances for big returns. This is because people operate somewhere between the extreme personalities of fear and greed. They do. Extreme emotions can be devastating to growing long term wealth.
I caution against any extreme action. Here is why: If you are wrong – you stand to lose a lot, either the purchasing power of your cash and gold, or the amount of assets you are left with if you risk it all. Those who miss out on a market recovery usually take years, if ever, to catch up. They wrestle with when to “get back in.” By the time the average American hears investment information, institutional traders handling large amounts of money have bought or sold, minimizing the “deal” or raising the price. What a dollar can buy, the supply and demand of money and goods, unemployment, and global activity change quickly. Regulatory oversight can be healthy or it can truly stifle a country’s economic growth, depending upon who is regulating, what they are regulating and for what purpose. Our ties to foreign governments both as strategic allies AND through our debt obligations are forever complicated and affect global markets, which is our reality.
Simply put, it isn’t simple. It’s extremely complex. If it was simple, we would have consistent and convincing advice being thrown towards the White House. And we don’t operate in a purist society – some stand to lose big politically and economically if we race down the “fix it” track. While it may be good solution for the U.S.A. in general, those who stand to lose may be the ones controlling the outcome and pace (little cynicism implied.) In personal finances, radical actions based on partial information leave one at risk that unknown information negates your entire purpose.
The beauty of fee-only comprehensive financial planning using functional asset allocation is that without assuming to know the future, we design and implement a logical plan that minimizes emotions. This involves understanding a lot about our clients: their goals, their present reality, their tax situation, what we can improve and what matters most to them. This helps us make calculated recommendations for investments and other aspects of their financial life. We focus on what matters most to our personal situation. Bert Whitehead, the founder of Alliance of Cambridge Advisors, points out that choices are either exogenous or endogenous based. We should understand what we CAN control and change through our own behavior, action and decisions (endogenous) without ignoring or dismissing exogenous realities.
Our recommendations include maintaining an adequate ”emergency” fund. They include preparing for a potentially long life that allows important choices: re: careers, choices about how much you will depend upon government programs such as social security to determine your quality of life, charitable and legacy planning, protecting your assets, good and bad debt management, long and short term financial needs and goals, tax planning, and others. We understand that peace of mind frees clients to a great extent from worrying about what the market does each day. Clients know their plan is logical, understandable and takes into account the appropriate risk for them. We help them to live smart with the goal of minimizing risk and positioning for growth as it fits their needs and life plan. An important endogenous factor is SAVING. Being prepared and ready for opportunities by saving and living beneath your means creates a wide path towards peace of mind. Your financial decisions should include keeping an eye on the big picture, long and short term goals and considering your financial stage of your life.
Signing off with the following article, written by Thomas Friedman, courtesy of the New York Times, May 8, 2010: http://nyti.ms/b9x9hO