I’m not sure who first used phrase, “You never get hit by the bus you see.” Even AI didn’t know.
But they have been words I’ve used in planning and investing for decades — and an important reminder of how important factoring “what ifs” can be.
Similarly, the term “black swan events” was popularized by finance professor, writer and former Wall Street trader Nassim Nicholas Taleb to symbolize unpredictable events that are beyond what is normally expected and have potentially severe consequences.
In other words, that bus you don’t see.
A parallel saying I also try to keep in mind is, “Man plans and God laughs.”
Financial history is full of examples of buses no one saw, many even in recent times.
The collapse of hedge fund Long-Term Capital Management back in 1998 was the result of a global ripple effect of the Russian government’s debt default.
The dot.com bubble and subsequent bust in 2001 while America was enjoying rapid economic growth.
Reckless home lending on Main Street and massive bets by Wall Street led to the near collapse of the banking system in 2007-2009.
And who can forget the COVID-19 pandemic that disrupted economies around the globe?
Each of these surprises led to fast and shocking declines in financial markets in America and around the world.
In hindsight, many of these shocking events seem kind of easy to have predicted. But as Warren Buffett has said, “In the business world, the rearview mirror is always clearer than the windshield.”
When I look at these events, what I see is a pattern of things looking pretty good right before things turned ugly.
Even back before the Great Depression, we had the Roaring Twenties and songs like “Happy Days are Here Again.”
Things today seem eerily similar, with most economists predicting continued (but albeit a bit slower) growth with stock markets heading ever higher.
Frankly, that makes me worry. Evidently, I may not be alone.
In a recent CNBC appearance, then-Goldman Sachs CEO Lloyd Blankfein cited historic patterns of a “crisis of the century” occurring every four to five years.
He noted concerns about the amount of capital following into private credit and that insurance companies may be overestimating the value of some assets.
Despite these concerns, Blankfein said he is still 100% in equities.
Others, including OpenAI CEO Sam Altman, worry about a “market bubble” in the artificial intelligence sector, comparing it to the dot.com bubble of the late 1990s.
Altman has repeatedly suggested that investor excitement over AI is outpacing practical returns, with the risk of major financial losses in the sector. Of course, he is sure his company will be one of the winners.
“You never get hit by the bus you see.”
As I’m writing this column, major stock markets are at all-time record highs, gold is at a record high and crypto is at dizzying levels, with some pundits even predicting it might even double by year-end.
Jason Zweig, who writes “The Intelligent Investor” column in The Wall Street Journal, talked about investors not being satisfied with these far above-average returns.
He said investors are looking for ways to juice up returns even more with new investment products being pitched that hold concentrated stock positions, sector bets and leverage. FOMO (fear of missing out) seems to be running high these days.
Note that I am not predicting imminent bad news but rather offering a reminder about the prudence of always considering a wide range of possible outcomes and trying to plan for them.
While there are no guarantees when it comes to investing, diversification is arguably the most important strategy in dealing with an uncertain future.
Sure, if the stock market continues its recent amazing upward trajectory, who wouldn’t want to be 100% in stocks?
But what if we experience an unexpected and unfortunate event that hits equity markets, and hits them hard?
Could you honestly handle another scary 50% drop like we saw with the 2007-2009 financial crisis? Or 19% in less than 60 days when LTCM collapsed? Or the 34% drop in just 34 days when COVID hit?
Could you really remain calm while watching $1 million fall to $800,000, $660,000 or $500,000? Or would FOBI (fear of being in) hit and cause you to do some panic selling?
And note that these results were for the broad S&P 500. But what if you had big bet on a single stock or sector in the dot.com era? Like Pets.com or Webvan, which both burned through cash without making a dime of profit, only to see stock prices soar before the businesses shut down.
Even some mutual funds took a big beating, like the Janus Global Technology Fund, which lost 84% from its peak.
Of course, there were some notable successes like Amazon.com and eBay, but lots of big losers when the music stopped.
It can be wise to review your portfolio while things are so good to make sure it is truly consistent with your financial goals, time horizon for reaching them, and your risk tolerance just in case.
What mix of risk assets (i.e., stocks, crypto, high yield bonds) and risk-control assets (i.e., investment grade bonds, money market funds, cash) makes sense for you? Is it a portfolio you can stick with if things get ugly?
During my career, we used to have “lifeboat drills” with clients to try to test their risk tolerance. We often found out that clients claiming to be very risk-tolerant quickly “folded like a cheap suit” when confronted with clear examples of big market downturns.
If there’s one thing that history teaches us, it’s that panic selling is a curse to long-term success in investing — and that hanging in there almost always pays off.
But not if you can’t take the heat and panic.
Then, based on your goals and ability/willingness to take risk, make sure your portfolio is prudently allocated.
Given the impressive rise in risk assets, it may be a lot riskier than you thought, making it a good time to look at doing some rebalancing.
Those boring bonds and money market funds may just help protect your nest egg from getting smacked by the bus you don’t see.
Finally, try to stop watching the market and your account so often. Markets have always gone up and down — and always will.
Instead, take a walk on the beach, ride a bike, go out to dinner, spend time with family and friends — and let your well-crafted portfolio do its long-term job.