Investing

Collision Course

I’ve said this before, but I’m going to say it again. We are conditioned to expect crashes in asset markets. After the tech bust in 2000, the Great Financial Crisis in 2008-2009 and the global pandemic last year, we’re more prone to feel the next crash is right around the corner. This is especially true the more recent the traumatic event. Having this feeling makes sense given how much more of a dramatic impression negative events leave upon us. However, this doesn’t mean a crash is coming or that we should always be positioning ourselves for a crash.

I understand why many of us may feel more unease today than in the past, but the truth is we’re always surrounded by uncertainty. We aren’t always aware of the uncertainty or don’t feel the acuteness of it as it seems to be distant or irrelevant to our personal situations. Regardless, uncertainty or risk is always present.

Looking at today, risks abound. That’s why we invest, isn’t it? Of course it is, we want to grow our capital! We can’t grow our capital at the rate we want to without taking on risk. So, what are the biggest risks today? It’s hard to say with certainty what the greatest risk is today but it’s probably the risks we either don’t know about or the ones we don’t believe have much chance of actually occurring. Everybody is talking about stock market valuations, government debt, inflation, China, a weaker dollar, etc… We know all about those.

  • Stock market valuations aren’t a problem until they are. A catalyst of some sort is usually necessary to trigger the negative impact of extended valuations.
  • If government debt is going to be an issue it’s probably going to be a slow developing issue over time and then hit us all at once. Again, that’s “if”.
  • Inflation will need to be higher for longer than is currently anticipated. At least some of this is already reflected in prices.
  • Something majorly unexpected with China would need to occur to lead to a crash in prices. Something unexpected implies something we’re not anticipating or even contemplating.
  • Like the economy, currencies go through cycles. The dollar has been weaker against a basket of currencies and may continue to get weaker. If the dollar breaks down further from here for a prolonged period that could be problematic.

What don’t we know or what aren’t we anticipating? That’s the biggest risk right now. One risk worth worrying about is if all, or multiple, of the risks mentioned above were to occur simultaneously. That would be a real hot mess. The takeaway here is that we’re always focused on the negative at the expense of the positive. Risk is always present. We can neither predict nor control when risk becomes problematic for our investment portfolios. All we can do is mentally and emotionally prepare ourselves for the inevitable risk off event that sends everyone running for the hills. With preparation and a sound investment plan, everything will eventually be okay.