Needless to say, the third quarter of 2017 was marked by significant disaster or threat of disaster. Major hurricanes rocked Texas, Florida and the Caribbean, and North Korea tested missiles over Japan while boasting threats of war. The start of the fourth quarter has been marked by the largest mass shooting in history as well as devastating wild fires in California. And human nature continues to give way to finger pointing and divisiveness.
Despite all these disasters, the S&P 500 and Dow Jones Industrial Average increased more than 4% during the quarter. How could this be when it appears the world is falling apart? Current earnings momentum and a strong job market are creating a stable backdrop for these disasters.
Some believe these disasters could create a boon to economic growth as areas spend to rebuild. History shows a split view on the actual impact of disasters on economic growth. Interestingly, an article published by The MIT Press Journals in 2013 determined that large disasters do not display any significant effect on economic growth in the short or long term.
Protecting ourselves from the impact of potential disasters is very much like managing portfolios in an environment that could see markets decline over a short period of time. There are three primary steps to managing such risks—realistically assess risk, safeguard risks and put risk in perspective versus return opportunities.
For human disasters, we need to assess what type of risks are most prevalent where we live. For example, is your area prone to hurricane, earthquake, tornado, fire, war threats or others? For markets, we need to analyze current valuations, opportunities for growth, and the investor’s individual ability and willingness to risk short-term market declines.
Safeguarding these risks is what helps us, as humans, to withstand the constant threat of disaster. For human disasters we need an emergency plan and an insurance plan to safeguard irreplaceable personal belongings. In our portfolios we ensure diversification to find investments that may do well when others fall. Holding some cash, bonds, commodities and/or alternative investments are options for cushioning a downturn.
Finally, we have to keep the actual probability of disaster in perspective. When disasters occur, the emotional toll can be taxing on all; the actual physical damage, however, typically inflicts a smaller percentage. Significant market declines have a lasting impact on investors’ memories, but keeping a long-term perspective is extremely important. Although past results don’t guarantee future results, historically, markets have always recovered from market declines.
We have choices every day. We can prepare for disasters like the ostrich and stick our heads in the sand, missing out on opportunities for love and life by being negative toward others, or miss out on long-term market returns by avoiding investments and hoarding cash. Or—we can fly like an eagle by preparing for disasters, show love and kindness to others each day and seek market opportunities for return by investing prudently. While it is often difficult to invest when the market is hitting highs, if you are investing for the long-term there is never a bad time to invest.