As a child, I remember my grandparents’ cinder block basement on the farm. I’d be down there with Grandma on laundry day, riding a faded red tricycle in the room next to where she did laundry. I’d do laps around this massive shelving unit in the middle of the room, pretending to be a race car driver. The shelves were full of canned goods, dry goods, and various household supplies. It was huge. Their back porch also had three giant deep freezers, which I thought was normal. After all, they raised cattle. However, three deep freezers is a lot of beef.
Both Grandpa and Grandma grew up during the Depression. Despite it being the 1970s and America having gone through one of the greatest economic expansions in the country’s history, the Depression had permanently scarred their outlook. They had successfully raised three children, ran a successful cattle business, and wanted for very little, yet they had enough to live off of on-premises for likely two years!
In my career as an advisor, there have been no shortages of crisis moments. 9/11, 2008, 2020, and perhaps 2022 all come to mind. It reminds me of a joke I heard about prisoners telling jokes at night; instead of telling the joke, they’d call out a number for the joke, and everyone laughed. I don’t need to describe the crises; I simply recount the dates in shorthand, calling up instant memories.
I bring these up not to relive them but to remind us that they passed and better times followed. The duration of the crises ranged from months to a year at the longest before recovery occurred. Risk management through these various points involved some more aggressive tactics, like raising significant cash for short periods.
However, crisis management is different from risk management. If one’s approach is to see every pullback or correction as a crisis, it will affect returns and potentially create unwanted tax burdens. The reality is that one needs to have two distinct categories: Crisis and Risk, and one needs to have different reactions to crisis and simply risk.
With simple risk, portfolios should be built with components representing the best traits that are desired. Buy the best growth and value, size, and regional solutions one can with a repeatable method. When the market occasionally corrects, as it does normally over time, the best should recover more quickly.
With a crisis, one should recognize an event affecting all market participants. The event could be a banking/financial crisis, a pandemic, an act of terrorism, or a sea change in government policy (such as 2022’s raising of rates after 15 years of near 0% and inflation). With each crisis, cash levels were raised to above-normal levels, and positions were trimmed to do so. The reason for cash is stability and principal preservation. In a crisis, the risk profile of investments tends to be the same, regardless of the investment’s qualities.
In closing, I will circle back to my original example of my grandparents and the Depression. It is hard to escape a crisis mentality. Recognizing that one is stuck is likely the first step to preventing it from having long-term negative effects on one’s finances and investments. Having a conversation, taking an inventory of how your finances are positioned, and making appropriate changes to move out of crisis mode is the next step. It is more challenging than it sounds to achieve this in today’s world. Mainstream media constantly flows with negativity because that is what sells advertising. Politicians bludgeon issues rather than speak with nuance. The world is ready to condition you to remain in crisis mode. Are you ready to break the mold?