Event Risk

Risk. Riske. Risque.

Investing carries all kinds of risk. Inflation risk is a biggie for those who like to buy safe, government, low-interest, low-risk paper. Yes, their investments always pay back...but they only get like 2% returns...and in a world of 3% inflation, that’s…a problem.

There’s market risk, too. Stock markets go up and down...all the time. Yes, over time they go up, but you might own stock in a great company...that in a bad market gets taken down...like all the other boats in the ocean when a big quake hits. And suddenly it's tsunami time and everything drops.

But historically, if you hold good companies long enough, their high quality bails you out of any short-term losses you’ve suffered.

So if these are normal risks…things that happen all the time...then what's an event risk...with the overhang that events like a solar eclipse or the election of a smart, ethical congressman don’t happen all the time?

Well, here’s an event: A meteor hits the earth, and all of a sudden, the most prized possessions are simple things, like water and gas and land with wood and animals on it. The value of your Amazon and Netflix stock? Probably not much.

So when wizened old investors invest, they typically think about “once in a lifetime” events as being risks they have to account for. And yes, thinking about that meteor hitting the earth is, in fact, one of the things a professional portfolio manager thinks about when building her fund.

A more recent event was the near-death experience of the U.S. financial system in the 2008-2009 mortgage crisis, where trust in banks and the banking system almost led to the bankruptcy of Goldman Sachs, Bank of America, JP Morgan, and a bunch of other formerly-perceived-as-bulletproof financial institutions.

Eventually, the capital markets worked. Investors came to trust the system again, and invested their money in the market with staggering results, in that the market went up some 400% in the decade after the financial crisis.

So events are a real thing. You have to think about them...until you don’t.