Financial Fire Drill

A couple of years ago, my family persuaded Maureen to take a cruise trip from Bayonne, New Jersey to Bermuda.  As we knew that she gets seasick, we thought that this would be a calm route for which to venture. Well, not so much. While we had a great time overall, the Atlantic Ocean caused some choppy seas during this trip. So much so, that one night at sea we were awoken by the sound of the hangers sliding rapidly from port to starboard. Future vacations will be land-based for a while.

But I could not help but notice as first time travelers on a cruise ship, the mandatory exercise that all must undertake while the ship is just setting sail.  Regulations require that everyone participate in a fire drill.  So while the veteran voyagers know about the life vests and the need to head to their assigned lifeboats, each ship is different and so it is mandated that all go through a fire drill to know what they should be doing and where they should be heading in the event of an emergency.

Clearly this has been required to help reduce the panic that would be inevitable if an emergency required such action.  However, it also makes all the travelers aware of the potential for such emergencies which became apparent in the disaster with the “Costa Concordia” cruise ship off the coast of Italy in 2012. Officials hope these drills will eliminate the surprise if the unthinkable occurs.

We believe this same fact applies with people as they embark on investing.  Thus, we go through what we refer to referred to as the life-saving financial drill.  This discussion requires us to talk about the various bear markets that have occurred since the 1940s to ensure the people are not surprised when they do in fact occur.  As a reminder, a bear market is when the prices of the stock market decline by 20 or more percent.  We have them go through this exercise to understand that “emergencies” are more common than most believe and thus our hope is that they will not be surprised when they occur. 

Surprise is the mother of panic

and panic is too be avoid with investing and seaborne emergencies.  In addition during this exercise we would go over what needs to be done during those bear markets to help people reach their financial goals.

We stress that during the inevitable bear markets – which occur every few years – we will be re-balancing or purchasing additional shares of the great companies in the U.S. and overseas to move them closer to realizing their financial goals.  They need to understand that bear markets are normal when investing in equities, but each new bear market will always be described by the financial media as the end of the world and they will insist that – “it’s different this time”  – the four most dangerous words in investing.

Maritime regulations require that anyone boarding a cruise ship understand the potential risks involved in such a voyage and the proper actions that need to be taken if such an emergency occurs.  Similar insights should be understood for any person venturing into investing to understand the risks of bear markets and what actions should be taken during the inevitable downturns to help them successfully navigate the current “emergency”.

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