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Victoria, TX 77901

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A Post-Mortem on Hurricanes, Floods and N. Korea

The last month has offered many lessons on life and financial management. Multiple hurricanes have delivered widespread devastation while a pint-sized dictator in North Korea threatens freedom and democracy.

If you don’t have a solid plan, it can be overwhelming.

Many things in life upset us. However, rarely is anyone’s life in danger. When a life-threatening storm is barreling your way, take decisive action. Load up your loved ones and get out of the way.

Now is the time to revisit exit plans and your bug-out bag. What worked and what should be changed? You may not need it for another 10 years—but you’ll be prepared to calmly assess and make rational decisions.

Physical possessions can be replaced. Review your insurance making sure you are properly covered for the big-ticket items.

The “500-year event” seems to be happening every ten or twelve years. As such, historical models may not accurately reflect the risk you are exposed to. Even if you live out of the flood plain, get flood and wind insurance. If you can’t afford to properly insure a major asset, such as a house, then maybe it is time to consider renting.

Assess cash needed to cover deductibles. Many have determined they had enough insurance, but not sufficient cash to pay for damage not covered or to fund deductibles.

Emergency money should be kept in cash. Do not look for a return on your principal, but rather a return of your principal. Emphasize safety and liquidity for your emergency money. Cash is it is like oxygen—you never know how much you need it until it is not available.

Keep six to nine months of living expenses in cash including an assessment of your deductibles.

The situation in Puerto Rico is nothing short of heart-wrenching. Their elected leaders have taken on too much debt. They are short on infrastructure necessary to return them to stability. This easily happens when we borrow too much money. It is even easier to do when using tax-payer funds under the illusion that it is not due for 30 years or because interest rates are cheap.

Hurricanes are one thing, maniac’s like Kim Jong-Un present an entirely different threat to investors.

We are very upfront with clients that different investments react differently over specific time spans. Cash and cash equivalents satisfy short-term needs (under 3 years) while long-time frames (10 or more years) are necessary for success when investing in the stock market.

The threat posed by North Korea is nothing new. However, Kim Jong-Un may be homicidal, but he is not suicidal. He does not want the end of the world. Rather he is using the threat of nuclear war as a negotiating chip.

Neither of his allies, China and Russia, want North Korea to have nuclear weapons. However, they will use this opportunity to negotiate benefits for themselves. We have not been in a standoff like this since the Bay of Pigs.

Many people expect a “significant” market sell-off. Maybe Kim Jong-Un will spark a downturn or it may be a completely random event. Either way, we will have another sell-off.

Over the past 100 years, a “bear market” (a 20% or greater decline in a market index) has occurred an average of about once every eight years.

According to research by Al Frank, there have been more than 30 “significant” world events since the bombing of Pearl Harbor. These were events like war, presidential assassinations, acts of terrorism and world calamity. The S&P 500 dropped an average of 8% shortly after each event. The worst decline was a 43% drop in the stock index during the 2008 market crash.

However, twelve months after the event the market increased an average of 19%. After 36 months, stocks had an average rebound of 42%. Sixty months later the market had appreciated by an average of 71%.

Whether human nature or mother nature, scary things will happen. Mentally bracing for these events is helpful. However, investors stand a much better chance of success if they accurately assess their short, intermediate and long-term goals. A proper cash cushion allows patience and logic to support long-term volatile assets without reacting to the crazy event of the day. 

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Dave Sather is a CERTIFIED FINANCIAL PLANNER and owner of Sather Financial Group. His column, Money Matters, publishes every other week.