Those of you who know me personally know that I am not an alarmist. I’ve suffered my fair share of adversity and have simply learned how to react.
In the midst of the devastation we are witnessing from the NSW/Qld bushfires fires, I feel compelled to point out situational similarities we must take heed of in our financial worlds. To be clear, I’m not forecasting a “financial fire”. But I am saying that there’s a number of risk factors which should influence your behaviour.
One of the important themes in our client reviews is the concept of the financial fire drill. Just like in a school or office environment, we contemplate scenarios where things go wrong and tailor a plan to ensure people stay protected and know what to do. Warren Buffett famously said to worry when others are greedy and be greedy when others are worrying; I believe it’s time to reflect on his message.
There are two key reasons this article is worth sharing:
1. The stage is set for a difficult “financial fire” season
Just like the environment for the actual fires we’re experiencing, there are a range of precursors that make for a potentially dangerous investment environment:
RISK FACTORS FOR RECENT FIRES
EQUIVALENT RISK FACTORS FOR INVESTORS
Segments of the market valued based on dreams rather than earnings.
Very low interest rates
Lack of backburning or recent disaster
Lack of recent recession or market events
Let’s face it, the current mood of investors is very different to that of a decade ago. It’s common to hear hands-off investors say, “the returns have been good so let’s just leave things the way they are”. It’s also common to hear hands-on investors say, “I’ve been getting 10%-15% returns for 10 years now so it’s easy”. It doesn’t matter how you look at it, that’s called complacency. It’s easy to see that a decade of recovery, low interest rates and great returns in most asset classes might do this to people. It’s a similar situation to that of the current fires which is why we use the analogy.
Just because it hasn’t happened in a while doesn’t mean it won’t happen. Wouldn’t you prefer to be prepared?
2. The results can get ugly when people don’t prepare
My family & I recently experienced a fire in a high-rise apartment block overseas. Luckily we escaped unscathed but, tragically, a security guard lost his life unnecessarily.
- The building hadn’t been designed with fire safety fully thought out:
- No fire alarms or smoke detectors,
- The stairs had windows which served to fuel the fire and distribute smoke
- The fire brigade & security guards lacked training and coordination:
- The brigade ran hoses 300m from their truck and up 11 floors.
- They didn’t touch the hoses installed in the building.
- The guard who died suffocated when using the lift.
- The residents didn’t know what to do:
- One lady evacuated but left her baby and child in the building so they wouldn’t be disturbed.
- The design of the stairwell made evacuation through smoke (and maybe fire) probable. No one had anything to protect themselves with (masks / blankets).
- The crowd didn’t know what to do.
- People got in the way of the fire brigade trying to see & video what was going on
- Other people got in the way because they didn’t want to take the slightly longer route home
- Some even argued with the authorities as they weren’t happy with the inconvenience.
What does a good plan look like?
Contemplate a range of scenarios.
While the list will differ for each individual or family, standard inclusions would be:
- investment market events (stock market crash, property crash, bond market crash),
- Reduced income as a result of a recession and
- health issues within a family.
Rate scenarios based on likelihood and impact
For example, a share or property market crash might have more impact on a newly retired couple than someone in their 30’s looking to build wealth.
Decide whether to mitigate or accept the risk.
- Market events can be mitigated by reviewing your investment strategy (Don’t forget Super)
- The risk of losing your job in a recession or redundancy may choose to accept
- The risk of a health event might be mitigated through personal insurances
Develop an action plan
It’s worth understanding that most of these events are charged with emotion. As we’ve seen in the media coverage of the recent fires, anxiety feeds on catastrophe and certain people and media will hinder your ability to remain level headed. For each scenario it’s worth thinking through what you’ll do, in what order and timeframe.
At Transition Wealth we put a big emphasis on our ongoing service because we operate in a world that changes rapidly. Changes in investment markets, the economy, business, family, health and personal plans all create opportunities and threats which you must address in order to experience financial security and success.
Over the years I’ve come to realise that rational thought in a time of emotion is invaluable. I’d add complacency to this also.
Hopefully this article will get you thinking and give you a framework to address the needs of your family and self. Sometimes these fires won’t happen for 20 years but when they do you’ll thank yourself for being prepared.