Surviving Scary Stories
By Arnold Machel, CFP®
“If you wait for perfect conditions, you will never get anything done.”
Ecclesiastes 11:4 (The Living Bible)
Tuesday (9:32AM) – call from J.S.
“Hey Arnold, I’m hearing terrible things about the US. I think I want to pull any US investments and re-allocate them to Canada. What do you think?”
Tuesday (10:41AM) – call from F.J.
“Hey Arnold, I’ve been reading that I should under-weight my allocation to Canada down to almost nothing as the Canadian economy isn’t forecast to do well over the next few years, and that I should move most of my money to US investments. What do you think?”
While paraphrased, these are two actual calls that I received from two separate clients on the same day. Both calling with concerns. Both having heard disturbing news. Both concerned enough to want to talk to me about it. But both getting totally contradictory advice. And, by the way, both hearing general advice – not advice given to them specifically for their unique and individual, specific circumstances.
What they had been listening to or reading is what I refer to as financial pornography. That may sound like a harsh term, but it accurately conveys the focus on sensationalism that our media can have. The fact is that our news media system isn’t incentivised to bring wisdom to bear… or even to focus on distributing truth, for that matter. Rather they are incentivised to increase readership. And they do that by sensationalizing news. That’s why they focus so much on HUGE, ATTENTION-GRABBING HEADLINES. I don’t mean to bash all news media. Many do not succumb to sensationalism for the sake of readership, but many, many do. And they’re the ones we are most likely to hear about. So, I’m not saying we should ignore the media. Just that we need to consider the source.
The simple fact of the matter is that no matter what we look at, no matter where and when we look, we can find problems and concerns. And if we or the media choose to look only at those problems (which are MUCH easier to sensationalize) and they become our only focal point, then there will always be a tendency to be fearful. But life is not just full of problems, it’s also full of opportunities. And we have had a long history of pushing through the problems and making our way past them. Just take a look at how the Dow Industrial Average performed during decades of crisis. Decades with many real reasons for concern…
| Decade | Headline News Items | Dow Jones Industrial Average Activity (DJIA) |
| 1950s | Korean War, Eisenhower Has a Heart Attack, Soviets Test Atom Bomb, Soviets Launch Sputnik | Dow grows from 198.89 to 587.59 |
| 1960s | Berlin Wall Goes Up, Cuban Missile Crisis, JFK Assassinated, Six Day War, Tet Offensive, Martin Luther King Assassinated, Robert F. Kennedy Assassinated | Dow reaches 947.73 |
| 1970s | US Bombs Cambodia, OPEC Oil Embargo, Worst Bear Market since 1929 (Dow falls 50%), Nixon and Watergate Scandal, Steve Biko Killed, Iran Hostage Crisis, Soviets Invade Afghanistan | Dow retreats to 811.42 |
| 1980s | 14% Inflation, 21% Mortgages, President Reagan Shot, Achille Lauro Hijacking, Market Crash of ’87, US Invades Panama | Dow slingshots to 2,144.64 |
| 1990s | Persian Gulf War, Civil War in Yugoslavia, Attempted Coup in Soviet Union, Mexican Currency Crisis, Oklahoma City Bombing, Asian Contagion, Soviet Bond Default, Clinton Impeached, Y2K Scare | Dow grows to 9,184.27 |
| 2000s | 9/11, US Invades Iraq, Hurricane Katrina Devastates New Orleans, Gas Prices Skyrocket, Real Estate Prices Collapse, Foreclosures Reach Epidemic Proportions, Stock Markets fall 55% | Dow ends 2010 at 11,557.51 |
I find looking at history objectively to be an incredibly valuable exercise. The Dow (looking at it over the long term) is a proxy for how a nation does economically. As an aside, if we chose to look at how it performed on a daily basis, it becomes more of a short term indicator of fear and greed, which is far less useful information. What the above quite clearly shows is that in spite of bad and scary times and in spite of some terribly negative events, good companies adapt and muddle through. Temporary declines usually represent opportunities for wise investors. As another aside, what the above misses is that if you were an owner of all 30 companies listed in the DJIA during this time, you would have also received income in the form of dividends the entire time.
Back to my callers. The essence of my advice to each of them was the same. “We’ve determined an asset allocation strategy for you based on your goals, your time horizon and your risk comfort level. It’s where we’ve determined that you should be. Unless something has changed in your life that I don’t know about, it was the right asset allocation strategy for you when we set it up and it remains the right one now. Stay the course. The media will shout out news from time to time and you will do best to ignore it. Maybe some times they’ll get it right, but more often than not, they’ll get it wrong or it will be too late. Stick to your long-term game plan.”
Pension plans follow a very similar strategy to the one I outline above. They follow a simple 3 stage process.
- Determine their liabilities over time (what they will owe the pensioners down the road). And based on the timing involved, they...
- Set an asset allocation that they know has historically worked.
- Then they regularly re-balance back to that original allocation, particularly when market forces cause them to be over or under their original allocation.
Pensions rarely amend their asset allocation. When they do, they are not huge adjustments based on a guess by somebody whether this asset class will do better or that one; rather, they are slight adjustments based on long-term historical trends or on a change in their individual circumstances. Pensions tend to be great investors over time and so we would do well to replicate what they do. Their secret is quite simply having a long-term game-plan and sticking to it.
As individual investors, we can and should do the same. Don’t wait for perfect conditions. Don’t be paralyzed by sensationalized headlines. Create a solid game plan and stick to it.
Arnold Machel, CFP® lives, works and worships in the White Rock/South Surrey area. He attends Gracepoint Community Church where he serves on the Leadership Team. He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services. Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. While every attempt is made to ensure accuracy, facts and figures are not guaranteed.