Risk managing a portfolio with markets near all time highs



Several weeks ago I was asked to join the steering committee for the Louisiana Chapter of the Fix the Debt campaign.  The purpose of this campaign is to raise awareness for our need as a society to tackle one of our most pressing social challenges – out of control spending.  As we contemplate the ramifications of our insatiable desire to lead lifestyles we cannot afford, I wonder where we stand as a society and where we might be going.  To prudently invest one must consider such things.

As I reflect on the current state of our society I am puzzled by some unusual ironies. At the time of this writing the S&P 500 is within 40 points of an all time high.  The optimists tell me it’s time to rejoice because our economy is improving.  As evidence for their arguments they point to the rising values of both my home and retirement accounts.  It’s as though I am supposed to feel more restored or fiscally whole, but somehow don’t.

I’ve spent the past seventeen years working within financial markets laboring in the laboratory of human nature.  The extreme volatility has instilled in me a healthy sense of skepticism. To validate my skepticism the pessimists tell me that all is not well in the world.  As evidence for their argument they point to our looming insolvency resulting from the political dysfunction in the “Divided State of America”.  In addition, they reference the historic levels of monetary life support being injected into our economy by an orchestra of global central banks all following our lead down the road of inflationary healing.

My days are spent contemplating the logic of both optimists and pessimists.  As a citizen, few people are more optimistic about the future of human civilization than me.  It’s the risk manager that is forced into the realm of pragmatic realism, and our economic reality has me concerned.  We’ve come a long way since I went on WDSU in October 2009 pleading with people to see the opportunity in the crisis.  With the market up over 100% since then, the time has come to pause, reflect, and survey the winds and the tides.

I’m not quite sure what to think of the current state of our society.  On the one hand record amounts of money printing and manipulation of interest rates are the reason both my home and investment account values might continue to improve.  On the other hand these same Fed actions are providing safe harbors for politicians driven by fear and unwilling to take bold action.  After all, behind every spending cut is a voter who will soon be seeking revenge.  So the Fed is enabling both my improving financial situation and deteriorating political situation at the same time.  It appears the price of my pleasure is my pain.  It’s no wonder I’m conflicted.

I find myself trying to reconcile the optimist’s naivety with the pessimist’s gloomy view of the world.  The realist continues to look for answers, but only finds more questions few people care to even ask.  Shakespeare once said that nothing is either good or bad but thinking makes it so.  Maybe I simply need to stop thinking so much.  Perhaps our economy is no different than any other facet of nature.  Fires and floods contain elements of both good and bad and have both victims and benefactors.  Who knows this better than people who’ve been tormented by water, but who’ve also long benefited from the replenishing attributes contained within the nutrient rich sediments floods leave behind?

Albert Einstein said no problem could ever be solved at the same level of consciousness that created it.  Could it be that we don’t ever really solve problems, we simply transcend them by achieving higher levels of consciousness? We know it takes a great deal of stress, heat, and pressure to mold a diamond.  Maybe Democratic societies require social stresses of their own to force an evolution in the way we confront change.  Hence the political phrase “never let a good crisis go to waste”.

While we wait for the powers that be to endure the stresses needed to evolve consciously, I’ll be maintaining a very flexible investment posture.  It’s what a risk managing, pragmatic realist gets paid to do.

Your trusted guide and friend,

Brad F Fortier, CFP®

Certified Estate Planner
President, Fortier Financial

Recipient of the 2010 Charlie Eisenmann Client First Award

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. 

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