GETTING CLOSE TO THE EDGE

Most people are defensive by nature. They are primarily interested in protecting against risk. An example of this was my daughter’s recent visit to the rim of the Grand Canyon. Her two small boys, who are still too young to properly understand danger, were anxious to run over to the unprotected edge to see the exciting view below. Despite the unparalleled beauty of the canyon, our daughter struggled to enjoy it as she focused all her attention on keeping the boys safe. Rather than linger and enjoy the moment I think she was relieved to be safely back in the car with the boys comfortably in their seat belts.
 
Her experience is very similar to the way many view the investing world. They stand at the edge of endless opportunity, but have a difficult time enjoying it as their minds worry so much about falling.
 
At a recent business conference, we discussed the state of the economy and, as usual, considered the risks we face going forward. Few times in my career do I remember a more positive outlook. It is difficult right now to find any area of real concern in our economy or the investment markets. And yet there is a major risk to investors that we discussed and, ironically, it has nothing to do with the economy. This risk, which could pose serious problems for our economy, is political.
 
Politics have always played an important role for investors, but never before can I remember a time when the long-term risk has been so great. For most of my life, both political parties argued and debated openly but then sat down behind closed doors and worked out compromises to keep the country moving forward. Unfortunately, in our current environment, it appears that compromise is no longer possible. If you take time to examine the votes coming from both sides of the aisle over the past 10 years, you see a growing gap between the two parties that shows no sign of narrowing.
 
One of the biggest current issues is the national budget and debt ceilings. These matters must be addressed and under the current hostile environment it is very possible that no agreements will be reached. If that happens we could be looking at a government shutdown that could dwarf the ones of the past. Now some may joke that we should just let it shutdown, and certainly some areas of government are more critical than others, but if it lasts for an extended period it could do long term damage to parts of our economy. I don’t sound many alarms in my practice, but I am sounding one now. I remain fully invested and optimistic but if our government freezes again due to the stubborn attitudes in Washington, there are some specific areas of the investing markets that I will be moving my clients out of. Politicians, in pursuing their own interests, keep selfishly pushing us closer to the edge, which could change a beautiful view into a terrible fall.