My current favorite television show is a Discovery Channel production called Man vs. Wild. In each episode adventurer Bear Grylls is dropped into the wild and has to make his way out. Although he is in a different wilderness each time, he uses basic survival skills to make his way to safety.
It’s odd I like the show so much: Grylls is almost my opposite. I have never been an outdoorsman. I appreciate the outdoors stuff; I just don’t do it. I think I’d last for about six hours on one of Bear’s week-long adventures.
But when I think deeper about the show’s allure, I see fundamental similarities between what Bear does and what I do. After sizing up the situation, he follows the same basic steps: get to vegetation, build or find a shelter, start a fire, follow running water downstream, drink water as close to its source as possible, and last, find food. He can be in the Yukon, the African savannah, the Siberian steppes, the Argentine Andes; the basics are the same. The type of terrain determines the particulars in each step.
In February I had a Bear Grylls moment; we all did. I had to stop and take time to orient myself to where I was and what was happening. After recovering 18 percent between December and early January, the stock market was in another free fall. We knew the economy was going to get worse before it got better. We were told unemployment was going higher and business orders lower. We knew housing prices had further to fall and foreclosures were increasing. I knew the stock market is a forward-looking mechanism, a leading indicator of economic conditions. So the market should already have priced in much of this information. But it seemed as though daily news was still taking the market down. Clearly, I needed to re-orient myself to the environment.
What kind of territory was I in? Whether it was familiar terrain or a new drop spot with unknown perils, I knew if I could get this part right, my financial-planning skills would let me guide clients safely in their financial decisions.
It seemed to me that we could be in one of four financial and economic environments. They range from the reassuringly familiar—and so, predictable—to a place of great unknown. Here, in simplified form, are the four possibilities I came up with.
- The U.S. is in a downturn—serious, scary, and long—but no different from past downturns created by banking crises. Government policy decisions will be tweaked, will match up with natural market forces, and recovery will follow in time.
- The U.S. is in a serious and different downturn. Policy makers are in new territory with no map and some of the wrong people at head of the table. But in time, smart decision makers will make themselves heard, some decisions made will work, and with natural market forces the primary determinant, a recovery will follow.
- The U.S. is in a serious and different downturn in which some of the problems are cyclical, but most are systemic. Policy makers, in new territory and without a map, will not be able to restore the capital-market system. The system is changed forever and prosperity may or may not be restored in my lifetime.
- What started as a cyclical economic and financial-market downturn is being orchestrated to wipe out the middle class and re-engineer U.S. society. The well-being and wealth of the U.S. probably cannot ever be recovered. Deciding which of these four most closely matches the terrain you see will go a long way to indicating how you ought to act financially. So read them again and pick the one you think is most accurate.
Still, once you decide, don’t completely rule out the other three. Just go with the highest probability of outcome. Now you take advantage of the survival skills of disciplined financial planning, working through the steps thoroughly, and in the right order. Experience tells me that although it is nearly impossible to predict short-term movements of the financial markets, you need basic premises to make decisions. You may survive by winging it, but the odds increase dramatically if you make sound assumptions. You should know the premises you are working from in this terrain, and your strategy and resources should match them. Thinking one thing and acting another rarely works. Throwing up your hands and not thinking at all almost assures failure.
Take the business of allocating your assets, for example. If you believe you are facing the first, relatively benign landscape described above, with economic recovery on the horizon, you’ll want to allocate a significant proportion of your assets to equities, since these are likely to benefit the most from a general economic recovery. If, on the other hand, your assessment of the territory reveals the bleak prospects suggested in number four, you will want to give substantial weight to precious metals and other defensive assets.
My assessment of the environment matches the second of the four possibilities listed above. So I have positioned long- and mid-term portfolios accordingly. They are built for an environment with low economic growth and rising inflation for the foreseeable future.
Actions in risk management, income planning, estate planning and the other related dimensions of your financial situation depend similarly on which of the four environments you see. And there are a host of particulars in each step that depend on what you have in your knapsack at the landing point, who else is in your party, your skills in shelter construction and fire starting, and the time you can give to each.
From the start, though, you have the comfort of knowing the process is going to assure your safety. If the terrain changes in the middle of the journey, you adapt. This approach, as Bear Grylls reminds us, is better than doing nothing or changing your mind every time you encounter a new piece of information. The disciplined process sustains you.
Because the financial environment, like the wilderness, has changing conditions and many unknowns, you have limited control. But if you make sound assumptions about the territory you’re in, know your destination, and use the skills and resources at your disposal, you improve the likelihood of safe arrival, limiting risk and avoiding stress along the way. Bear and I know.