Observations: Another Lesson in Resiliency
One of the more entertaining aspects of being in the financial planning profession is that you can take almost any story from around the globe and spin it into a lesson about investment portfolios.
The world is full of great material if you have the right frame of mind. Needless to say, I feel very fortunate to be in one of the professions that have the opportunity to observe the fundamental intersection of human prosperity and behavior.
The most recent of these world events to enter the spin zone has been the great Texas Ice Age, which will last about a week compared to the ten-thousand-year and civilization stifling reign of the Younger Dryas ice age. Geological significance aside, modern punditry dictates that renewable energy folks and people not fixated on rotating gears and panels dive into their respective trenches for the upcoming news cycle. However, wherever you land on the fate of the planet vs energy security debate, this episode is really just another example of a system being hit by an event that is statistically unlikely to happen in any given year. When the Electric Reliability Council of Texas (ERCOT) ran analyses on its windmills, natural gas lines, and nuclear reactors, it likely decided the cost of proofing them for an unprecedented weather event (unprecedented being the favorite word for anyone who didn’t plan whether it’s a camping trip or a distribution network) would have added additional costs to what were already expensive infrastructure projects.
Instead, Texans could look forward to cheaper energy at the unintended expense of three million or so people having a very, very uncomfortable week and a smaller subset experiencing tragedy. Come to mind, there’s probably another article in here about professionals making cost/benefit analyses but not having skin in the game. This is why financial advisors should have the same portfolios as their clients. Unfortunately, that’s a topic for another time.
Having provided an explanation as to why people in Texas are cold yet better-off than our prehistoric ancestors, I am always perplexed by our collective inability to build slack and resiliency into our lives and systems. It’s not from a lack of examples. Personal experience is filled with late doctor appointments, fiction has stories of ruinous dinosaur theme parks, and the Old Testament has a pharaoh receiving a lesson in savings from God himself. As recently as last year, everyone received a first-class lesson at the start of Covid-19 when just-in-time inventory methods led to supermarket shortages for various products. Not taking risk into account can be very profitable when times are predictable, but paralyzing and ruinous when faced with a disruptor. The only caveat is that some disruptors are more predictable than others.
This brings us to investment portfolios. Unlike freak weather events in a changing global climate, the market has a well-researched history of market cycles and how the various investment vehicles (stocks, bonds, alternative assets) respond. We don’t know when market changes will happen or the magnitude, but they will happen with a certainty approaching death, taxes, and pharaoh’s dreams coming true. Since a market shift is more likely to occur in any given year than an electrical grid crippling weather event or a global economy paralyzing virus, the prudent decision for an investor is to not invest like ERCOT. This doesn’t mean sitting in cash in anticipation of an extinction-level event. If you’re retiring or nearing retirement, it instead means ensuring the fixed income and alternative asset side of your portfolio is sizable enough to meet your life needs during a market downturn. With the equity portion being globally diversified to avoid concentration risk, yet still able to participate in gains of the broader market. In summary, plan for the cold and build resilient portfolios.
Note from the Author: Resiliency for us younger investors is a different conversation. To bring the geological references full circle, we are like the rodents of the Mesozoic Era. We can take an ice age or asteroid hit and still rule the world in a few million years.
Partnership Advisor, HFG Trust
Wise investing is to keep risk at a level you are personally comfortable with, while building a portfolio that can weather a storm.