“Let the Good Times Roll” by legend B.B King. It’s a great song — but it recently got me thinking…How many of you are taking into consideration a diversified investment strategy approach?
I can’t quite believe I’m saying this, but the sentiment in the song is the crucial problem that we have to address as financial advisers, and as your partners in a journey towards financial security. Many underestimate the power of a diversified investment strategy, and this is crucial to any financial planning.
Essentially, human beings are good at assuming the good times will continue. What we’re really bad at – at individual and institutional levels – is realising that good times don’t roll forever.
Basically, we have a problem. The way our brains are wired seems to make it difficult for us to imagine a future considerably worse than the current reality we’re living in. Even when we try, our brain immediately rides to our rescue with promises and platitudes – saying things will never get that bad.
The problem is, things can – and probably will – get that bad. Consider this: real estate boom and bust cycles last an average of four years. Economic cycles last about the same. Here’s a fact: In in the US, boom and bust cycles have averaged some 39 months in up times, and 18 months during downturns, for the period between 1854 and 2009.
Let that sink in a second. For over 155 years, one of the world’s largest economies has been seeing fluctuating fortunes about every three and a half years or even fewer. The US has been driving the world for at least the last 70-something years. And the maths shows there have been some 20 ups and downs during that time. Some major, some minor, but they’ve been there. Not only have they been there, but they have had a major impact on societies and economies globally.
And yet, we still find it hard to accept the possibility of a future worse than our current reality. We think we’ll never grow old, never be fired, never have ill health. Rationally, we know this to be untrue but our “lizard” brain still fools us into disregarding gloomy scenarios.
Don’t just think it’s an individual problem. The 2009 crash was widely predicted by economic and political experts – but just as widely ignored in the run up to 2009 as the financial ambush lurked like an elephant in the room” Looking back, we’re stunned that no one acknowledged the warning signs. But while the positive portfolio evaluations were rolling in, and the good times were yielding returns on equity indices, and spliced derivatives were the new thing, not many could bring themselves to exercise prudence and spoil the party.
After the economic crisis, many called this behaviour “greed”. It isn’t as simple as that. Human minds are naturally programmed to capitalise on present-term gain. We’re inherently optimistic. It’s how our ancestors got by. If you have food, you’d best eat it now – because there aren’t any refrigerators anyway. In a way, our own evolution is getting in the way of things. We’re genuinely shortsighted when it comes to imagining dystopias.
Consider global debt. It’s a high figure and getting worse by the day. But the only reason to borrow money is when you believe the future is better – and bound to stay being better.
But markets do shrink. Interest rates rise. And people – and countries – with big loans get caught on the hop.
We’re eternally optimistic. And that’s a wonderful thing, but it makes the job of financial planners a lot harder. Because the first thing to do when securing a financial future is to deprive the current you of some disposable income to guarantee your future self financial security. That’s hard to do when a part of our heads is thinking the future’s always going to be rosy.
As professional financial advisers, we’re here to help people, investors and organisations challenge the assumption of an inevitably bright future. Having a diversified investment strategy will inevitably avoid any dramatic dangers to your investments.
But this is our job, and we’re going to do it. The first step towards any sort of planning, and a sound diversified investment strategy, is to realise that those good times aren’t going to roll forever. Sorry, B.B King, but even you, with all your fantastic brilliance, became old. A lesson for us all – if only we learn from it and we must all learn from it.
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