View From Our Backdoor – Flood! Wealth Management & Water Damage
This is the view from our back door. Our little town of Issaquah (a suburb of Seattle) was hit by massive flooding last week. Grateful that no one was hurt, and our house survived intact and inhabitable. The waters crested just inches short of inundating the main floor. As we surveyed the aftermath of the flood – I couldn’t help but think of the many parallels between the flood and prudent wealth management.
Know the Risks
When my wife and I purchased this home for an investment, we knew that its location on the banks of lovely Issaquah Creek made the property very attractive but could also be a potential liability. As part of our due diligence we researched historical flood records, checked USACE & NOAA records, and talked to older neighbors to try and get a clear understanding of the potential risks. Because of our research, we were not surprised by the flood (although I must admit that it was much more visceral and dramatic than we could have imagined!)
You might consider doing the exact same thing with your investment portfolio. Do you know the historical risk of your investments? We like to model the adverse impact (in investment nomenclature it’s called Drawdown) of a portfolio during recent downturns like 4th qtr. 2018 (a short blip) 2008-09 or the 2001 tech meltdown, so we can try and understand and estimate how a client’s portfolio might have acted. We may also run sensitivity analysis and project what their mix of investments might do if; recession occurred, treasury bond interest rates increased or decreased, inflation increased, and other scenarios. By doing this we can try and quantify appropriate expectations and verify if we are financially and emotionally prepared for an adverse event.
By the way, the day we wrote the offer on the property was a bluebird summer day. Sunny and warm, and Issaquah Creek was only inches deep as it gurgled merrily through the backyard. It was hard to imagine any kind of risk from the babbling brook. The stock market is kind of like that for much of the time. Mostly going up, making investors wealthier and happier. But look ahead and know that someday – sometime - a downturn (like our flood) will happen. Make sure that you understand and are ready if and when that day happens – and enjoy the good days in the meantime!
After we bought the home, we took steps to help protect it against a future flood. Most importantly we installed three high capacity sump pumps with water sensors and redundant power sources, and a gas generator with auto switchover to provide power to the home and pumps in the case of a power outage during a flood. We also discussed runoff and culvert options with an excavation expert and met with the city planning department. Despite our best efforts, Mother Nature overwhelmed our preparations and our basement flooded. The pumps were critical though in minimizing the damage and we were glad we had taken pro-active steps ahead of time.
In just the same way, we might consider what financial steps we should take in the case of an economic downturn or a personal crisis. Given your personal circumstances, what should you consider? Should you payoff or paydown debt? Increase cash reserves? Rebalance your portfolio? What are the sensitive and vulnerable areas of your family’s financial plan? Lots of issues to consider. Perhaps your personal and portfolio situation is just fine - but the time to verify that is before the flood.
My wife and I were very happy we had invested in the high-quality sump pumps far ahead of time. When the forecast warning of imminent floods hit the internet a few days beforehand it would have been too late to try and get an electrician scheduled in to do a rush job. We were (at least somewhat) prepared.
Do Proper Risk Planning
We also were very thankful that we had planned for unexpected risk. When we purchased the home, we extensively researched insurance options for mitigating risk in case of a flood and ended up getting flood coverage. The policy will not cover all the damage that we sustained, as it may be up to us to repair the yard and landscape. However, we are very grateful that costs associated with the basement damage will be reimbursed.
What have you done for your own personal liability planning? Regarding your investment portfolio, do you need some fixed return assets for your diversification plan? Have you properly insured your career/earnings, your life and your home and car liability? Again, you might be just fine, but the time to discuss and review that is before the flood.
Secure Your Income Plan
This is a topic that I consider extremely important to financial well-being. We have designed a Robust Income Plan exercise that we take our clients through where we try and answer the question, “What will happen to your Income in a Market Downturn?” Our Robust Income Exercise tries to project what our income amounts and sources might be during a minor or a major downturn. It includes an extensive checklist with action items to consider that might help make our income plan more robust. If you are a client, you have probably already been through this once, or even several times with us. If you are not a client, we would be happy to share an example for your benefit.
As I’m writing this, it is once again a pleasant day in Issaquah, blue skies and no rain. A time like now is when you want to check how Robust your income plan is – before a flood.
So, what do you do when the flood hits? At our home, we are very grateful for and a big shoutout to Gentry Gevers and Garrett Grigas. They recognized the situation early in the morning and proactively had sand delivered to the home at 4:00 AM and then spent hours throughout the morning shoveling sand and placing sandbags. Their early and swift action was decisive in keeping water out of the main floor of the house.
If (and when) we suffer through a flood like event with our portfolios, what should you do? During an adverse event, it is typical for a portfolio to become unbalanced. It may be appropriate to consider rebalancing the investment positions. There are several studies that suggest periodic rebalancing might contribute to better returns and lower risk over long periods of time. You will want to evaluate if rebalancing makes sense during an adverse market event. You might also want to review if any tactical investment opportunities have suddenly become available and attractive. Baron Rothschild famously said that, “The best time to buy is when there is blood in the streets”, and followed his own advice to amass an amazing fortune.
A downturn can also be a great time to take advantage of tax strategies. A few examples; Roth conversions might be especially appealing if you can convert beaten down investments to a Roth with the hope of enjoying a tax-free rebound in the future. Tax-loss harvesting is another strategy to reduce your tax bill and enhance after-tax returns of non-tax deferred investments. Check with your tax professional during such an event – maybe you can create some lemonade out of the lemon in that situation.
Most importantly, be patient! Market history has taught us over and over again that downturns, while painful, tend to be relatively brief, and longer periods of market expansion and growth tend to follow quickly. We are cleaning out the damage to our house and will recover, and we are looking to more good times ahead with our property.
If you plan and understand ahead of time what might or could happen, you might be able to make good choices without a lot of negative emotion or too much worry, just like Garret and Gentry who were calm, hardworking, effective and made great choices.
So, let’s finish our little homily on an upbeat note. Issaquah Creek is a jewel of the community and a treasure of our property – most of the time. It enjoys abundant salmon, steelhead and cutthroat runs, is home to the popular Issaquah Salmon Hatchery, and is the centerpiece of Issaquah Salmon Days, one of the largest community festivals in the country. The blessings and abundance it provides far outweighs the very rare occasions of flood damage.
The stock market is very similar. It has been a great source of abundance. Because of the stock market, many here in the US have enjoyed prosperous retirements, children have had college educations paid for, it has been a source of gifts for charities, endowments for public institutions like colleges, has provided funds for retiree pensions, and many other financial blessings. And yet, sometimes and periodically the stock market has a precipitous event just like the recent flood in Issaquah Creek. However, and just like our lovely creek, the blessings, abundance and wealth creation it has offered investors is far greater than the occasional downturn.
Our house made the national news! You can see @GentryGevers and @GarrettGrigas shoveling sand in the backyard.
Our job as wealth managers/investment advisors is try and help our clients Know the Risks, Be Prepared, Do Proper Risk Planning, and check how Secure their Income Plan is. We want to help our clients be Patient and take the appropriate steps when a flood like event happens.
Much of the time the investment markets are more like the day when we bought the house – sunny, warm and pleasant. When our portfolios enjoy those kinds of economic circumstances, we want to be Grateful with them and be joyful and celebrate as they reach their financial goals.
Do you know if your Portfolio and Income Plan is ready for a “Flood” like we just endured?
Please email us at email@example.com if you would like one of our team to follow-up for a complimentary discussion.
Warm (& Dry!) Regards,
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