I recently finished a book on engineering titled, Structures, or why things don’t fall down, by J. E. Gordon. It is one of the best books, on any topic, I have ever read.
For several years now, I have enjoyed playing a thought game after I finish a book. I do my best to distill the entire book down to a single sentence. I feel if I can do this, it likely means I understand the material well. If I struggle to summarize it, it probably means I do not, and I should go over it again.
My only criticism is that, in this case, it was done for me. My one sentence summary was the same as the title of the book. Yet, for a book this interesting, educational and fun to read, I happily accept that.
It is worth remembering that the fundamental force that is constantly trying to tear everything down is gravity. Since gravity is constant, we tend not to notice it. Yet it is the reason why we prefer the elevator to the stairs and why little children are not constantly falling up.
Basically, things do not fall down because they have been effectively designed to resist the forces acting on them and are built of materials suitable to that purpose.
Financial portfolios are similar in that way. There are forces constantly acting against our wealth accumulation plans. Like structures, if we do not design and build our financial portfolios well, they might be laid low by the forces of fiscal gravity.
And have no doubt, the world of wealth building has its own kind of gravity. Instead of having a single word for it, we call it lots of different things like over spending and under saving, taxes, inflation, negative health outcomes causing disability, competition, technological changes, market crashes and litigation, to name only a few.
To the extent possible, we want to arrange our personal and business financial structures to resist, accommodate and account for these forces. Doing so will maximize our likelihood of success while minimizing the possibility of catastrophic failure.
During our country’s rapid expansion west the number and design of railroad bridges were vast. Some of those designs, according to Gordon, were not as sound as others and frequently failed. Consequently, there was often a collective sigh of relief when a train made it all the way over a long, rickety, trestle. A happy byproduct of both proper engineering and unified planning is that they often lead to greater confidence, along with healthy outcomes.
The word most often used in my industry to describe the way to stay financially safe is “diversification.” The metaphor most often used to convey the concept of diversification in a way that is easy to understand is “don’t put all your eggs in one basket.” If you drop that basket, all your eggs might break. That is bad.
If you use many baskets to carry your eggs, you will preserve a great many of them even if one or more, should fall. That is good. Most people, children included, understand this concept easily enough. Why then, do some otherwise intelligent people not heed this wise advice?
I believe it is for some of the same reasons that engineers made faulty bridges. A desire for greater profit, as well as plain old, run of the mill, status quo keeping.
Given that today’s interest rate environment is so anemic, people are of the desire to “let it ride” in the stock market. They hope they will make more in the stock market than by investing in traditional fixed income.
So far, they have been right. The danger is that most poorly designed bridges worked just fine until the moment they collapsed. I suspect that fact did not comfort the people who were on them when they fell.
Also, we humans have a tendency to keep right on doing whatever it is that we have been doing. Even when we know or suspect it is not ideal or, in some cases, that it is downright bad. Like most things in the human experience, this tendency can have great utility in some instances, but can lead to our demise in others.
No structure on earth, no matter how well engineered, will survive the impact of a Texas sized asteroid striking it directly. Neither will any financial portfolio. Nothing, that we know of, can be designed with zero risk.
What most folks want is for the bridge they are driving over and the portfolio they are relying on to not fall down. Especially, when it is carrying them over the crucial terrain of their lives.
If you would like to work toward designing a personal or business financial structure that is well engineered and resistant to falling down, speak with a financial planner who has earned your confidence and take action.
Scott R. McGimpsey June 22nd, 2020
This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Neither Cetera Advisor Networks LLC nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm. Securities offered through Cetera Advisor Networks LLC, Member FINRA/SIPC. Advisory services offered through Summit Financial Group, Inc., a Registered Investment Advisor. Summit and Cetera are affiliated and under separate ownership from any other named entity.