“Glum” isn’t a technical economic term, but the word captures how investors feel about the economy. Investors are worried about mounting evidence that the global economy is slowing down. The fear is that the slowdown could turn into something much worse.
The fortunes of the stock market are only loosely linked to the economy’s performance. False signals are commonplace. The national unemployment rate is a low 3.7 percent. Businesses and organizations are hiring, consumer confidence is high, and inflation remains subdued.
What will the new year bring? Not even giant financial institutions with their armies of talented mathematicians, scientists, financial engineers and traders can pierce the veil of ignorance about our economic future. Instead, focus on managing your financial risk.
“How will we deal with surprises — outcomes different from what we expect? What are the consequences of being wrong in our expectations?” asked the late economist Peter Bernstein, a wise observer of the economy and markets. “Risk means the chance of being wrong — not always in an adverse direction, but always in a direction different from what we expected.”
The core idea behind risk management is to limit the downside fallout of being wrong. Risk by this measure is the chance of a permanent loss of money, meaning you have to delay retirement or can’t change jobs. Rather than trying to predict the future, I would put aside the 401(k) statements and spend time on basic household risks. For example, how secure is your income? Are there steps you can take to improve it? If you are carrying too much debt, reduce household risk by paying off debts. Perhaps you are thinking about saying goodbye to your employer for the last time. A possible risk reduction move is to phase into retirement by lining up a part-time gig.
I have always liked the risk-management wisdom in a famous Wall Street anecdote. In 19th-century New York City, a man was in a panic after putting all his money into the stock market. He wanted to be rich, but if the stock market crashed, he was financially ruined. He couldn’t sleep. One day, seeing the imposing figure of the great 19th-century financier J.P. Morgan on a street, he summoned up his courage and asked, “Mr. Morgan, I’ve investing all my money in the stock market and I can’t sleep. I’m a wreck. What should I do?” Morgan replied, “Sell down to the sleeping point.”
That’s risk management in a catchphrase: What is your sleeping point?
Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.