Debunking Financial Myths Part 10 – No Need to Plan or Pack an Umbrella
When the skies are clear and the forecast is rosy, it may seem pointless to pack an umbrella or buy bottled water, flashlight batteries, and gas for your generator. It can seem equally unnecessary to consider how your portfolio and financial plan would fare during a recession if the economy is growing nicely.
“It is not likely that the United States will experience a recession in 2008.” – Diana Furchtgott-Roth, Chief Economist, U.S. Dept. of Labor 2003-2005
This now infamously faulty prediction from 2007 demonstrates how even smart and well-informed people failed to anticipate the serious problems that led to the 38% stock market collapse in 2008. And, to be fair to Ms. Furchtgott, many of her fellow economists were only mildly concerned about the possibility and risks of a slowdown. Meanwhile, many regular investors maintained stock-heavy portfolios and skimped on cash, bonds, fixed annuities, and other less-risky alternatives. Expecting more market gains, they left their financial futures exposed and unprotected.
A Prudent Jack: Back to our weather analogy; would you cancel your home’s wind insurance policy if a meteorologist said the chances of a hurricane were low this year? I hope not. Managing your investment risks means being prepared for unexpected events, even if the probability is low. With the luxury of hindsight, of course, we can look back and see how financial storms develop and what happens in the aftermath. A well-built financial plan needs to be a “Jack of All Trades” so it can help address recessions, market corrections, inflation, interest rate hikes, and missed investment gains. And, any prudent steps you take will only help if you implement them before bad things happen!
Eventually Right: The funny thing about predictions is that, eventually, even some of the worse soothsayers could be right. For years, gold pitchmen have fervently proclaimed that gold’s value would double . . . and they’ll eventually be right. Take all of the predictions about the stock market, interest rate hikes, the value of the dollar, and future economic growth, with a huge grain of salt. (Maybe economic forecasts were invented to make weathermen look accurate!)
I confess, I like quotes and analogies, so I have an original quote for you that puts a bow around our myth-busting series: “Build your financial plan with a mix of investments, and don’t bet everything on someone else being right!”