Of course I accepted the challenge. A couple of friends invited me for an indoor rock climbing experience. Looking up that 35’ wall – it adorned with comfy finger grips, and me with rope, harness and fancy shoes – I felt “No sweat.” I scampered up the first 15,’ looked down and admired my progress. Climbed another 5’… ditto. Then a little voice in my head started getting louder, and louder. The final 5’ took forever. I rappelled down, celebrating yet hoping no one noticed. “Hey Brian, how was that last bit?”
‘Risk tolerance’ shifts – over time, and at varying emotional states. The happier or more confident you are, the likelier “Bring it on.” But in times of greater stress or uncertainty, the tendency is “Let’s slow down.” It’s human nature.
Rational decision making and human behavior often clash. Throughout history, people have endured cycles of boom and bust, while rationalizing (or hoping) that this time is different, but it’s really not. An accident waiting to happen, and it generally does. It’s often a sequence of an abnormal expansion fueled by speculation, excess leverage and regulatory under-sight, followed by panic, then conflagration fueled by illiquidity, and (often frenzied) “regulatory reform.”
That experience can scar, emotionally and financially. “Why didn’t I see that coming?” or “I’m burying my money.” Those scars may heal. Your behavior matters.
And the good news is that you have tools and resources – things that you can control – to help you enjoy financial success:
• Run your personal finances like a business – Goals, written plans, and contingencies
• Diversification – Investment strategies and risk management
• Engage and delegate to experts – Know what you do best, and find the best to do the rest
These are challenging times, with some reasons for optimism:
• US household debt fell to its lowest level in 6 years. The WSJ reported that families cut their debt for the second straight year ($209 billion in 2010 alone). Main Street gets the austerity message.
• I am sorry for the victims of the Japanese disasters. However, some commentators sounded another ‘sky is falling’ and relate Three Mile Island. Don’t they know history? During the TMI crisis, Walter Cronkite reported “The world has never known a day quite like today.” But Americans don’t stay down. Site clean-up took about 12 years. On 3/28/79, the S&P 500 stood at about 101 – ten years later, it had had climbed three-fold to 309. And the Japanese too shall dig out. The Nikkei has recovered about two-thirds of its decline.
• More retirement accounts have grown. The DJIA delivered its best quarterly performance (3/31) in 12 years.
It’s OK to be optimistic. Keep that rosier-than-thou faith in yourself, your country, and its future. Occasionally, all need a swift boot, or two.