Credit: Smilin' EyenTreasure, Fine Art America
What Happens When Interest Rates Rise? Is the single most debated and asked question of 2015 within the financial community and among individual investors. How does one comment on the most obvious “event” in financial market history; it’s the flaming psychedelic swan that you can see coming from a million miles away, rendering it a non-event. Much like Y2K. Of course that does not stop the financial services community from pontificating just loud enough to cover their back sides, so here we go..
Nothing of any genuine significance should happen if the Fed raises interest rates .25%. But who knows. Will Asia’s over-leveraged masses go collectively bankrupt paying more for the loans on their cars, houses, renovations, “guaranteed return” special-just-for-you structured insurance products that provided a champagne free-flow of money these few years. Maybe, but unlikely. We’ve been to that Rodeo in 1998. Will retail bond fund investors collectively freak out. Maybe – probably not though, most don't understand their funds well enough to panic. Will China or Greece blow up? Haven't they already?
No, it’s more likely that someone somewhere has gamed the system much like that AIG charlatan in London a.k.a. Patient Zero who sold all the useless “insurance” on derivatives products (no he’s not in jail) in 2006-2008. I suspect the next crisis trigger will be hidden in reinsurance or some such dark part of the financial system that you've never heard of, that everyone who has ignores, and that those really in the know call “bullet proof”. If we've learned but one thing living in the tropics all these years it’s that nasty things grow in dark places while they are being ignored. Like SARs.
So, what to do.. Don't waste your time Googling “reinsurance crisis 2016”, but ask yourself one question with all its implications for your investments: How much will the US dollar strengthen, how quickly and for how long? And then go back to the yoga mat and reflect on the following realities that successful investors understand:
- In the short term anything can happen;
- Your worst fears may happen, but not when you expect it;
- Things you never expect inevitably happen, so enjoy each day, be kind to your children and those less fortunate and don't diet too often;
- Long-term investing is like a respectable first marriage, 15 years. If you have one foot out the door (or bed) with your investments, why are you clinging to them? Nostalgia? Convenience? Fear?
- 30% corrections happen. If you cannot handle it over the long term then definitely do not get into equity markets, real estate, bond funds or commodity funds.
- People on TV who make predictions are entertainers, financial thespians.
- If you are reading this, you are a small investor whose single greatest asset is patience because you are not a fund manager who believes he or she can beat the markets and tries to prove so year after year to keep their job/buy a house in the Hamptons etc.
One thing I will guarantee is this: When the day comes that we experience another financial crisis, if you do not have an investment strategy that you genuinely understand, you will panic. I have lived through five financial panics and have survived because I had a financial plan and all of the trimmings that go with it. Sometimes it is that simple.
So what am I doing? Like we did in 2007, keeping some financial powder dry, getting our homework done and stocking up on popcorn just in case there is an Financial Crisis Redux we can watch on TV.
If you absolutely must worry, worry about the loss of a loved one, a humanitarian crisis, human trafficking, global warming, the old lady next door who is all alone etc. Money - eventually you will get through and over any financial crisis and move on.
Enjoy your summer, life’s too short.