Economic news shows often sound like someone pounding a single key on the piano. This week it’s all about the coming recession. Analysts are falling over each other trying to guess the date and time it will officially begin, with side predictions on how deep and long it will be. Financial talk shows pit financial advisors against each other in a predicting battle which resembles something you might more likely see on a sports channel. While driving I wondered if I was listening to legitimate financial experts or Vegas bookies handicapping the college football playoffs. I wouldn’t be surprised if Vegas has begun offering spreads and money line bets on the next recession.
So, what is an investor to do? Let me share a story I learned while in Dublin, Ireland. Driving along the river, Launa and I noticed an interesting work of art we just had to investigate. It featured a series of sculptures of people walking. But these were not ordinary people. They were ragged, torn and appeared almost barely alive. Further study revealed the work was a tribute to those who died in the great Irish potato famine of 1846. The tragic event took over a million lives on a very small island country. An additional couple million were forced to emigrate to avoid starvation. It was a horrific event, well portrayed in the desperate faces of the Dublin statues.
The source of the famine was enlightening. In short, land in Ireland in the 1800’s was largely owned by barons who rented the property out as small family farms. Over time, the landowners became increasingly greedy and raised rents until it was nearly impossible for families to survive. The solution the farmers found was to focus on growing potatoes. For the area, potatoes produced more food per acre than any other crop, thus allowing the farmers to pay rent and still have enough food left over to survive. This was not an ideal situation, but it kept the people alive until tragedy struck. Potatoes are subject to blight and when the disease came through the island nation, it devastated the only crop and left the population starving. Had other crops been available they would have survived the blight.
Investments, like crops, respond differently to different market conditions. A market “blight” that may destroy one sector might leave others untouched. Rising interest rates harm one investor while helping another. Inflation devalues currency while inflating hard assets. The proper investor response is similar to what a nation of farmers should do. Try to put together a well thought out diversified portfolio that is designed to survive multiple economic outcomes.
Diversifying investments through prudent asset allocation does not guarantee investing success, nothing does, but it is an important component of reaching long-term investing goals while minimizing risk. The Dublin statues remind us of a terrible tragedy, but they also teach, if you are listening, that the tragedy would not have occurred had the farmers been allowed to diversify their crops. There is a great investing example in that story.
Dan Wyson, CFP® is author of “The Gold Egg," and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 - 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor