The Rising Sun and Rebuilding after Disaster

I feel for the people of Japan – those who have lost loved ones, are sleeping in the snow, or have had their lives disheveled by the earthquake and tsunami. Thousands of miles away, many find ourselves connected to the disaster, whether it be helping the survivors, or wanting to know the probable impacts.

Not an economist, trend predictor, or nuclear physicist, I’ll leave the forecasting of oil and stock prices, and the future of nuclear energy, to the commentators and speculators. However, I will use the disaster and related insights as examples of why you do two things. First, diversify (anchor your risks) and keep a long term perspective (unless you and your lineage will end in the next year or two). And second, you have written success and disaster plans. By doing those two things, I trust you’ll have greater security and confidence in managing your future.

Major observations from Japan’s tragedy:

1. The Japanese economy is not suffering a meltdown. The country is in a state of emergency. However, the area most affected represents about 3 – 4% of the country’s GDP (leaving about 96% relatively ok). And interruptions in the supply Japanese manufactured parts will be solved by other suppliers (regionally or globally).

2. Markets tend to over-react. The markets despise uncertainty. And the greater the event, the greater the uncertainty. Eventually, damages are repaired, and the markets correct. This process is generally quicker for natural disasters than for man-made crises (e.g. the financial collapse of ’08, war, etc.). And there are similarities to the Kobe quake in January ‘95. In the 5 days following last week’s quake, the Japanese stock market fell about 20% (many global markets are down 5 – 10%). In the same 5-day period following the Kobe quake, the Nikkei fell about half as much – yet it later dropped further. However, by year’s end, the market had recovered. (Note: Japan represents about 8.5% of today’s world economy, about half its global position 15 years ago).

3. The whole is more than the sum its parts. The notion of emergence goes back to Aristotle’s time. It’s the phenomenon where organisms, communities, and systems organize; and lower-level rules develop into higher-level sophistication. New behaviors and properties emerge. And the relationships within these ‘systems’ are critical. We get order from chaos, and complexity from simplicity. It’s why schools of fish and flocks of birds appear to move as one; the “invisible hand” guides markets and prices (and creates bubbles and crashes, complexity, uncertainty, and regulation); and a business enterprise is more than the skills of its employees (the chemistry of mission, values and culture help them innovate and break through troubled economic times, or fail). And despite death, damage and despair, the people of Japan shall rebuild and persevere.

In summary, support your fellow man, and lead your family, communities, and associates with plans for a better future – and contingency plans for life’s ‘surprises.’ Quoting Denis Waitley, “Expect the best, plan for the worst, and be prepared to be surprised.”

About Brian Loy

Brian Loy writes insightful and inspiring articles about the ever-changing world of personal finance and the global trends that affect the risk and return on investments and shape the financial- and retirement-planning process.
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