Always Account for Risk

I first saw the movie “Jaws” as a teenager while working on the Hawaiian island of Lanai.  Though we normally spent our afternoons at the beach, after seeing the movie we lost our appetite for being in the ocean. My buddies and I realized that the movie did not make our beach any more dangerous, but it changed our perception of the danger that existed. Eventually we ventured back into the water, but with a much greater awareness of the risks we faced. For the first few days I was sure I saw the shadows of a dozen great white sharks in those waves.

This week two white sharks were spotted along the shores of Seal Beach in California. This same week a shark killed a snorkeler off the island of Maui. As a result, the Maui beaches have been closed for a time. Seal Beach remains open but signs warning of shark sightings have taken their toll on the crowds. Certainly surfers and swimmers have always known that the ocean is full of potentially dangerous creatures, but recent events have heightened awareness of those risks.

Many people blamed “Jaws” for ruining their fun of swimming in the ocean, but shark experts were glad the movie had awakened people to the real dangers that have always existed. Maybe for swimmers, a scary movie or occasional shark sighting can be a good thing.

A man walked in my office in 1999, unhappy that his current advisor had been averaging “only” 12% in his account. Given the man’s age I thought his advisor was doing a wonderful job, but he thought that 30-40% would be more reasonable. I once told an audience in 1999 I was concerned it had been so long since the stock market had been down, that many investors and their advisors had forgotten what a down market looked like.

It has been six years now since we have had a serious market correction. With over 10,000 Americans retiring every day, there are now over 21 million current retirees who have not seen a down stock market since retiring. Likewise, a large percentage of current advisors have never even advised a client during a down market. I worry this combination may be a recipe for disaster. Perhaps a financial shark sighting, or scary movie, will remind people that danger is always lurking.

I am not sounding the warning that a down market is near, but I am warning that I am seeing too many investors and their advisors following strategies that do not properly prepare for that risk. Either they have forgotten the lessons of the past or they weren’t around to see them.

Hawaiian shark attacks and stock market crashes are much more rare than the days without them, but they do still exist. I remain optimistic, but if the only time we think about and plan for these events is when we see trouble in the news, then we may find that what has been going “up” for so long may come crashing “down” on us when we least expect it.