Prepared Investor (eBook)

Introduction

“I’m just not going to look at my investments. They say I need to hold on. They say it will pass. But this is once in a lifetime! It’s unprecedented! I’m not going to sell, that’s for sure! Just give it time; someday it will come back. I’ll just work a little longer if I have to. Everyone is going through it; I’m not alone. I can hold up my end of the bargain. Bad times don’t last forever; I’ll just keep my head down and do like everyone else until things clear up.”

—Financial Crisis, 2008

“No one could have predicted this. It’s such a tragedy. Anyone who says they saw this coming is just trying to sell something. It’s affecting so many people! I’ve lost so much money, so what’s going to happen now? Nothing is ever going to be the same, is it?”

—Technology Bubble, 2000

“How will I get through this with my financial future intact? My money has been dropping and I’ve watched my portfolio shrink; I just need to stop the bleeding. What if it keeps dropping? What if I lose it all? This has never happened! It’s totally new! Everyone’s afraid. Maybe I should just sell so I can’t lose any more.”

—9/11 Terrorist Attack, 2001

“This is unprecedented—we’ve never seen this before. No one knows what to expect because it’s all so new, so scary. No one knows what to do. All the news talks about is fallout and unknown consequences. It’s the worst we’ve ever seen! Everywhere I look on social media, it’s clear we’re all in for an extremely difficult time ahead. How are we going to get through this?”

—COVID-19 Quarantine, 2020

There’s a typical Wall Street response to any and all crises, including the ones above: keep your diversified portfolios in place, and someday, maybe years from now, investments will return to where they once were. The typical Wall Street investment advisor will remind us that bad things have happened before. They’ll say, “It will affect us temporarily, but you need to hold on. Someday, maybe years later, markets will recover and we will have put that tragedy behind us.” They’ll add, “Your portfolio won’t disappear, but of course it will be affected. Everyone will be affected. You might have to tighten things up a bit, but it won’t be the end of the world. Take the long view and everything will be okay. We’ll get through it together.”

This type of wait-it-out mentality implies that there is no way at all to prepare. It suggests that, in the face of crisis, you are completely out of control without any action available to move you financially ahead. How has the majority of the investing public accepted this for so long?

The just-hold-on approach has survived to become Wall’s Street’s main answer to crisis investing for three reasons. First, it works, albeit inefficiently. Just like a stopped clock will tell the right time if we wait long enough, the vast majority of portfolios will rise again someday to surpass historical high values. Second, investors often feel comforted by this approach. We all feel a little more secure knowing that we’re not alone and that we’re hanging on alongside everyone else. Misery loves company and the wait-and-see approach capitalizes on this. The third reason there’s a one-size-fits-all approach to crisis rests on the principle that “easy” sells better than “complicated.” It’s such a basic concept, anyone can get it. All you have to do is nothing. Let time fix the problem.

This tradition of patience and wait-it-out isn’t altogether a terrible approach because, sure, given enough time, the markets do come around, but at what expense? Could you have gained while others were losing? Do you have years to wait when your income stream relies on your portfolio today? By doing nothing to prepare, how many more years of work are you accepting before you can retire? Could you have more money to spend each month later in life? There is a future you, an older person you’ve yet to meet, who will look back on the choices you’re making right now and wonder, “Why did I wait all that time to take action when I could have been prepared? If I could have recognized the opportunities within the crisis to protect and grow my portfolio, why did I do nothing?”

No one wakes up magically prepared for calamity. Preparation is an intentional act requiring education, resolve, and pattern recognition. When you are prepared, you experience less fear, engage in more grounded decision-making, and exit the crisis far better off than those who did nothing. Procedurally, preparing for the next major financial crisis is no different from anticipating any problem such as a broken water pipe in winter or a flat tire on a lonely road. When I taught my teenage daughter how to change a tire, it took some resolve to set the time aside and provide her that education. Her training wasn’t only focused on what to do after the tire is flat; it also focused on pattern recognition and cause-and-effect exercises. For example, if you don’t have a jack and a tire iron, then you won’t be able to fix your flat tire, so get the equipment and keep it in your trunk. If you mindlessly drive into potholes, the probability of getting a flat is greater. Because the chance of getting a flat increases with bald tires, checking your tire air pressure and treads is a habit worth developing. Preparing for that future flat tire requires foundational work like education on how your equipment lifts the car and learning the importance of staying calm as the traffic roars by your parked vehicle.

When the next flat tire strikes, could my daughter just stand there on the side of the road? Could she just do nothing and wait? Sure, she could, but it’s not the optimal strategy. At some point, someone might come along who will offer her a ride. Maybe she stands there an hour, maybe all day. Doing nothing isn’t bad or wrong; it’s just not going to efficiently get her back on the road. Some of the teenagers my daughter knows have shared that, in their opinion, cell phones mean they don’t need to learn how to change a tire. They aren’t wrong. They just aren’t prepared.

Being prepared starts with accepting that certain things happen over and over. My phone inevitably will run out of juice so I plug it in each night. That simple act of preparedness ensures I have the use of my cell phone all day. I have a protective case around my cell phone because I’ve accepted that I may occasionally drop it. My wife keeps an umbrella in the car because, one time, she was caught in the rain and, when she got soaked, it derailed her whole day.

Preparation is not predicting the future. If I get a call and learn that my daughter has a flat tire, it will be a surprise. I couldn’t predict she’d have a flat at that time, in that weather, on that road, on the way to that important appointment. And the next time she gets a flat tire, it will be just as much a surprise. That second flat will assuredly be in different weather, on a different road, and on her way to a different appointment. But the work she does as a driver, ahead of each flat, is the same. And the work she does once the crisis hits is extremely similar despite the changing details of how the flat occurred. If she’s headed to a formal dinner, she might focus more on protecting her clothing from dirt and grime. If her tire goes flat on a hill, she’ll need to seriously examine how to lift the car safely on the incline.

Preparation doesn’t remove the element of surprise, but my daughter’s knowledge and feeling of being prepared for a flat, even if the chances are slim, lowers the elements of risk and loss. Being prepared means she’s sure to spend less time stuck on the side of the road. A quicker turnaround means less exposure to a lot of other unknowns that might happen on the roadside and could lead to worse problems that are harder to imagine or predict.

Preparation in the Financial World

Picture a world where people don’t keep spare tires because they plan to just stand on the side of the road waiting for something or someone to come along who helps them get going again. Sounds crazy, right? Yet that is exactly what most people do in times of crisis with their investment portfolios. The prevailing approach to financial crisis is to wait it out. At some point, maybe years later, the portfolio will be back to where it once was. But this waiting game isn’t a prepared response, like staying calm on the side of the road, changing the tire, and being on time to an appointment. When crisis happens, the passive approach of waiting exposes your financial future to irrational fear, panic, and counterproductive behaviors—the opposite of preparation.

Imagine a scenario where multiple people get a flat tire at the same time in the same place. The one person who had prepared for this emergency is back on the road before the vast majority of other drivers. What’s more, the road is mostly empty now because so many people are standing on the shoulder of the highway waiting for help. This means the prepared driver will reach the destination faster. When the next crisis strikes, the strategies provided in the pages ahead will enable you to do more than just get back on the road; it will accelerate you ahead of other investors. Becoming a Prepared Investor means you will be able to calmly protect, and even grow, your net worth in the face of crisis.

This book and the perspectives within it are a culmination of more than twenty years’ investment acumen built on a decade of military experience that began at the U.S. Military Academy at West Point. Training and preparation have been the bedrock for much of my success,...