Recently we have had conversations with a few clients about making changes to their portfolios due to the current events in Japan and the Middle East. Our advice is not to make changes based on current events. One should only revise their portfolio if their goals or personal circumstances change.
A good friend of mine lost his wife to cancer two weeks ago, she was 58 years old. I was speaking with him the other day and he asked me for my thoughts on what I thought he should be focusing on now. While his personal circumstances have changed, my advice to him is to not do anything for at least a year, when he can think and make decisions more clearly. We both heard the same statistic, that the average length of time for a new widower to remarry is about 6 months. We had a good laugh about that statistic since we both could not imagine that the average widower is making a good decision in that short a period of time.
We are all tempted to make decisions during emotional events. It’s human nature. The events in Japan and the Middle East are human tragedies for sure. However, this is usually not a good time to make decisions about one’s portfolio, since we do not know how accurate the information is about these events. As Warren Buffett has been known to say – “In the short run the market is a voting machine, in the long run it is a weighing machine.”
No one knows for sure what the real long term impact the events in Japan and the Middle East are going to have here at home and globally. However, we can draw on some history for guidance. Remember Three Mile Island? That problem was resolved and now there are several reactors operating on the same sight. No one has ever been killed in the U.S. from a nuclear accident. Yet many people are killed every year in coal mining accidents and unless it involves a lot of people, we never hear about it.
In the short-term, the media shines a light on events that is so bright, that we can’t accurately see anything. They get us to worry about events that most of the time we should not worry about. As evidence, not long ago we were all supposed to die from SARS, the Bird Flu, etc. Remember the Killer Bees? We should have all been dead by now. The Gulf oil spill was an event of Biblical proportions. Today there is almost no evidence that it has occurred.
As for the Middle East, very little is going to change. It has not changed very much for the past thousand years. The developed world will begin to back (bribe) the least crazy leaders, so we can get back to some form of stability. Some measures of democracy will develop there, but it will take decades. The internet, it turns out, is a great tool for the development of democracy.
I love Mark Twain’s comment about all of the things in his life that he worried about. “I have been through some terrible things in my life, some of which actually happened.”
While I don’t want to under estimate the importance of solving the very serious issue in Japan, after all it is the world’s third largest economy, I am very confident that the Japanese people will solve this problem and recover from it. We just don’t have very good information right now. That tells me that the Japanese officials are working on solving the problem and less worried about giving the press and media updates every 10 minutes.
So the bottom line is that, this too shall change. The secret to successful investing is to make decisions on factual data, not emotions and have extreme patience. So I’d prefer to wait and get factual information about these situations, before making decisions about the longer-term impact on our portfolios.
Also, keep in mind that the stock market was probably due for a 5% to 10% pullback. These events were the excuse to make that happen. Our portfolios are and have been strategically positioned for much less risk than the market, because we believe we are not completely out of the woods yet from the aftermath of financial meltdown that occurred in late 2008 and early 2009.