Being Risk Adverse

Being Risk Adverse

Being risk adverse means being proactive about maintaining high levels of financial strength, agility, flexibility and endurance.

An interesting phenomenon occurs when you purposely zoom IN and OUT of investment time horizons:

Zoom OUT over many decades and review the wide variety of major events that have occurred all over the world. You will likely be able to maintain a sense of calm, even as you read the formidable list of creative and destructive events that have impacted the world and markets in dramatic ways. As you see these events from such a distant perspective, notice the historic resilience of the economy and investment markets. Notice how long-term economic growth has sprouted and re-sprouted, in spite of encountering many bumps (winters) along the way.

What does this tell us?

The financial markets have been quite resilient over long stretches of time, and capitalism – at times aided by very positive developments and at times hindered by very negative events - has historically prevailed through thick and thin.

While we believe there always exists threats to capitalism, fairly strong resilient forces – namely the human desire to be free, to love, to survive, to learn, to grow and to flourish – seems to keep the progress going.

An economic phenomenon called creative destruction, which explains how the old is continuously replaced by the new, is the other constant to observe and understand. On one end, old solutions and the investors and workers associated with them are displaced. On the other, new opportunities and the investors and work force pursuing them, are rewarded. This is why prudent portfolio managers (and all of us) need to continuously monitor business cycles and innovations and continually assess and respond to change.

The good news is that the net effect of these forces – over long periods of time – has been WEALTH CREATION, IMPROVED HUMAN CONDITION and ECONOMIC GROWTH!

While geopolitical risks, natural disasters, system collapses and wars – constantly threatening black swan events - humanity has a long history of rising to challenges and making ourselves less vulnerable and more capable as we progress. This said, bad things do happen, and we must be prepared to weather storms and long winters. This is what risk aversion is all about.

What do bad economic storms and winters look like?

Go back and zoom into the Great Depression and Great Recession and you’ll witness just how quickly things can get dark, stressful and volatile and remain that way for years.

These are times when a domino effect of negative outcomes rapidly occurs and disrupts the economy and investment markets.