rogernusbaum

Sam Ro citing Gartner Research said that 42% of CFOs have no contingency plans for a second wave of the Coronavirus should it happen. I am less concerned with whether the number is right or why it would fall to CFOs as opposed CEOs but am very interested in personal contingencies if there is a second wave of the Coronavirus as well as personal contingencies in the face of some other shock. The first wave has thrown all sorts of trouble at us; job loss, overdue bills, empty shelves at stores, interruptions of our food supply and those might be getting worse.

In terms of how we live our lives, we now realize that we took a lot for granted, arguably too much for anyone who was out of everything much sooner than they thought. It's an uncomfortable feeling to get caught off guard. However difficult this was, today's bias in the news (as I am seeing it) seems to be that we overreacted and that this event is winding down (to be crystal clear, that is not my opinion, I have no opinion, I don't know enough to have an opinion, that is how I am reading sentiment today) so it becomes reasonable to wonder whether next shock has a bigger impact. The next shock could come as soon as a second wave, maybe sooner. With what you've learned from this event so far, what changes are you making in terms of items of have a little more of around the house, more food, thoughts on how to stay fit, anything related to monthly household finances or how to protect your investment portfolio.

I've written quite a few posts lately about resiliency on all fronts because while I find it interesting to examine different aspects of life to increase resiliency I tend to believe in reiterating what I believe are important messages. Life comes down to a few big building blocks and creating resiliency in the face of unexpected and adverse circumstances is one of those big building blocks, at least for me. It is very empowering to improve your preparedness in the various areas you care about but it is important to understand you can't get out in front of every surprise.

Nassim Taleb is quoted as saying "The three most harmful addictions are heroin, carbohydrates, and a monthly salary." This sentiment has a seat at the table in discussing resilience. Addiction to heroin as a problem speaks for itself. Taleb seems to be in the low carb crowd (I regularly pound the table in all of my constituencies about how bad carbs are for us) but the mention of salary as a harmful addiction is thought provoking. It speaks to taking things for granted. Not having a salary is about being self employed in the belief that you are more in control of your job security if you're your own boss. I believe in this, you either do or you don't. However you can still work around being overly dependent on a monthly salary or vulnerable to losing your monthly salary, by developing other streams of income like some sort of internet gig, developing different marketable skills or finding an investment property where you can be cash flow positive.

Portfolio resilience is just as important. In the face of an unexpected large decline (and they are almost always unexpected) resiliency comes from being able to meet your cash needs if you have any and having a strategy that will allow you to navigate through without panicking. I've said countless times, finding out you had too much is risk assets after a large decline is a bad place to be. Time will bail you out of that situation of course but you will either be very stressed or end up making a bad decision (selling after a decline). For my money the path to portfolio resiliency goes through having a diversified portfolio. What diversified really means is that not everything goes up together because if everything goes up together then it can go down together.

Harry Browne created the Permanent Portfolio (25% each to stocks, long bonds, gold and cash) on the idea that no matter what is going on in the world, at least one of the four will be up. While 25% in gold is way too much for me, in the name of taking bits of process from various sources to create your own process, the idea of always having something that should go up when equities go down resonates with me. That is a form of contingency. For now that means GLD, BTAL, TAIL and SH. These types of funds (there are others of course) offer resiliency in the form of less portfolio volatility...most of the time.

The drama of this drawdown puts a spotlight what I think the top priority of investing should be which is having enough money when you need it. The stock market goes up the vast majority of the time. You just need to go along for the ride and when market conditions are especially challenging, ensure that you don't make mistakes that result in the permanent impairment of capital. If the stock market averages a 4.8% annual return for the next 15 years, then the S&P 500 would double. I don't know if that will happen but based on history, that's not a terribly heroic assumption. Where would you be with your portfolio if you captured 3/4 of that move? We know that whatever the average annual return of the next 15 years, it won't be a linear return of that percentage. There will be a couple of nauseating declines but those won't change the outcome that after some period of time, the S&P 500 will hit 6000. That's why I like to borrow the Peter Lynch line about not knowing where the next 20% is but being certain where the next 100% is. You just need to act accordingly, you need enough resiliency so that you aren't overly complacent, aren't emotionally or financially wrecked by a scary decline and have your cash needs taken care of.

If you have a year or two's worth of cash set aside then you shouldn't need to worry about the recent volatility, that is your contingency. If you're still accumulating then being able to buy 30%, 20% or 10% cheaper than you were willing to pay a couple of months ago is a gift when you can change your mindset to realize the opportunity for what is.