The Independent Market Observer

4/16/13 – Outlier Events

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Apr 16, 2013 9:16:26 AM

and tagged Market Updates, Yesterday's News

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Like everyone else, I have been affected by the terror attacks of the past couple of decades. I mourned those killed in 9/11, cried for the Sandy Hook children, and sat appalled at Oklahoma City, but the Boston attacks have hit home the hardest, literally. I have never been to Oklahoma City, never lived in New York, so as much as it hurt, it was abstract—removed.

Not this time. My wife and son easily could have been at the finish line for the Boston Marathon. They were at home, working in the back yard, but they could have been there. I have friends who work in that area and had gone down to see the race. I haven’t heard that any of them were injured, but it could have happened.

This hurts in a new way, more deeply and immediately than the previous attacks. I know my family and I are blessed in so many ways, but I am more grateful than ever that we are safe, and my thoughts and prayers go out to those who were injured or who lost family members. Thank you to everyone who reached out to make sure we were safe.

Yesterday was exceptional in other ways as well. The price of gold has fallen off a cliff, with the largest decline in 30 years yesterday. Reports this morning are of a 7.8-magnitude quake in Iran. On a much less weighty note, the U.S. equity markets also took a hit yesterday.

What are the takeaways here? I regularly get commentaries from various sources that declare we are doomed, based on reasons that range from the solid to the fantastic. It’s hard to refute them definitively; after all, anything can happen, as we have just seen. Less regularly, I get pieces on the wildly optimistic side, usually from people looking for investment capital, and again, they are hard to refute—it could happen.

On a long enough time line, anything that can happen will. This is the less-heard flip side of the Herb Stein quote, “If something can’t go on forever, it will stop.” But it’s become increasingly difficult to evaluate what the relevant time frame is. In my own town, I have been through a couple of 500-year floods in the past decade. Something tells me we need to take a closer look at the probability distributions we use.

This is why it’s so important to have real diversification in our portfolios and to plan for outlier events ahead of time. I have written before that failure to plan is planning to fail, and that diversification should be based on fundamental reasons rather than historical accidents. Yesterday’s events made me revisit those points in my own mind. I have life insurance, for example, but if I didn’t, you can be sure I would be looking at it today.

Anyone who expects future market behavior to match the past should be aware that, even if it isn’t different this time, that doesn’t mean it will be the same as last time. I’ll have more to say in the future about the appropriate sample set for evaluating results, but for the moment, I’ll just say this: more things can happen—and will—than anyone expects.

Stay safe out there.

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