Costs & Benefits Of Preparation

If you own property in a storm-prone area, or know someone who does, you likely understand that preparation is a necessary cost – but one that is nevertheless excruciating. If it’s a vacation home, then perhaps it involves driving hours, gathering the necessary supplies (usually when everyone else is trying to do the same), and spending time/energy getting everything into place. Often the forecast changes, and it turns out all that preparation was for nothing.

It’s somewhat understandable, then, when you hear stories of people who perform this ritual for years but one day decide it is unnecessary. It seems like it is precisely that time when the storm remains on track and devastates the property. After many months or even years, plus many calls with the insurance agent, they may rebuild and the cycle begins anew.

Unlike vacation homes, there is no insurance providing complete coverage for investment portfolios. In addition, forecasting technology for bear markets does not exist in the way it does for hurricanes. And yet, the average advisor and investor arguably views financial disaster preparation less seriously than coastal homeowners view storm preparation.

See, there is no way to know if an impending decline in stocks is of the category 1 variety or a catastrophic cat 5. Unlike a hurricane, where one can have an idea of the severity days in advance (and sometimes a week or more), financial markets provide little warning.

Therefore, it is our belief that one must carefully consider all the signs and have a plan to act accordingly. Systematic investing is tool for doing just that.

We recently wrote about the anatomy of a bear market to help financial advisors understand how we dissect market “downside.” Not all declines are created equal, and some level of damage is inevitable, but having a pre-determined plan for each of the three distinct phases allows you to put all the focus on execution when it is time to act. This year has provided an excellent real-time example.

After enjoying sunny skies and mostly perfect conditions in 2021, the clouds began to build in January. As a result, our systematic investing process took the first precautions by reducing exposure to the areas where damage was most imminent, such as international stocks. Notice we did not board up the house, nor did we ignore the situation altogether and go paddle-boarding. Think of our actions during this time as simply putting the beach umbrella down or securing the lawn furniture.

The next three months produced a steady decline in conditions, so much so that we again reduced exposure to riskier assets going into May. As we enter June, we have finished our preparation. The shutters are locked, and the sandbags are in place.

While we wait to see the outcome, we rest confidently in the words of Kafka quoted above. Our process is designed to keep our advisor partners and their clients on track toward completing their goals. We believe further declines will not affect us as severely as they otherwise would if we had done nothing. And, if markets rebound, our process will rotate us back to allocations where we can participate in those gains.

It is our view that the odds of success in almost any pursuit – be health, wealth, or maintaining a beautiful property – is optimized by the steady application of fundamentally sound rules. Like everything in life, these rules have costs, whether it’s saying no to a piece of cake, an intense hour at the gym, or boarding up windows in the face of a storm that never materializes. But for those with their eye on the prize, these near-term costs pale in comparison to the long-term rewards.