As I am writing this column, the stock market hovers in near-record territory on remarks made by Federal Reserve Board Chairman Jerome Powell suggesting that the central bank will cut its benchmark interest rate later this month.
Personally, I don’t find signs of a global economic slowdown reassuring. That said, surprise on the upside and the downside is endemic in markets. You don’t know what the future holds. That simple realization isn’t a brief for nihilism when it comes to personal finance (or any other part of life), observed the late Peter Bernstein, Wall Street’s famed philosopher of risk.
“But recognizing your ignorance of the future does not mean you have no view of the future,” wrote Bernstein. “Rather, it means you recognize your view of the future could be wrong. Then, if this is a situation that really matters, you manage your affairs so that you will survive the possibility of being wrong.”
The wisdom in Bernstein’s risk-management perspective was reinforced by an experience early in my career. In the early 1980s I edited investment newsletters for Elliot Janeway. Better known as “Calamity” Janeway, he bellowed about the dire straits the nation was in — and how to profit from the turmoil.
The economy at the time was scary. Inflation was high. Interest rates were at double-digit levels. Oil and food prices were in the stratosphere. Despite his flaws, Janeway did have a genuine talent for spotting trends early.
Here’s the thing: Janeway’s money counsel was ruinous. He wasn’t a fan of diversification and he exhorted people to embrace gold. Janeway’s followers did well at first, but in the early ’80s the bull market in gold ended and the bull market in stocks started. Janeway kept flogging gold for several more years.
Janeway ignored Bernstein’s insight to ask “What is the downside? What if I am wrong in my prediction?” In other words, how prepared are you if your expectations are dashed? Diversifying assets is one answer.
Risk management is more than the investment portfolio. I would focus on building a savings cushion and reducing your consumer debt.
If you are carrying credit card debts and/or auto loans, now is a good time to focus on paying them off and, once cash flow is freed up, boost household savings. The financial maneuver will lower overall household risk if the economy does stumble. If the surprise is on the upside, you will be able to take advantage of any opportunities that come your way.
Chris Farrell is senior economics contributor for “Marketplace” and a commentator for Minnesota Public Radio.