The Snake, The Weather and The Market…A Fable

April 28th, 2008 at 09:50am Tom Muldowney

  Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF® 

A learned professor was hiking through the mountains.  Pondering as he walked, he glanced skyward just in time to see a majestic eagle drop a small snake from its talons.  The snake was hurt badly when it fell on the rocks.   

The professor, moved with pity, picked up the snake and put him in his knapsack, took him home and excitedly nursed him back to good health.   

The professor was so fascinated with his ward that he took him wherever and whenever he hiked.  One day while walking through the mountains, he reached in to his knapsack intending to release the snake back to the wild, when at once, the snake bit him poisoning him with his venom.  The professor asked him “Why did you bite me?”  As the snake slithered away into the rocks, the professor laid there dying.  On reflection, he said “I shouldn’t have been surprised, after all, you are a snake and this is in your nature.” 

The season of winter comes as surely as do the other seasons, every year.  Winter includes shivering cold, snow shoveling, drifts, and slippery roads.  But winter also brings some benefits for some folks.  Some folks earn their living in the winter.  The snow plowing crews come to mind.  The cold and the snow do allow us to snowmobile, ski, toboggan, and sled.  We can make snowmen and snow angels.  And, let’s admit it, when the snow is fresh and the ground is covered with a blanket of snow, the landscape is truly beautiful. 

Just as seasonally, after winter comes spring.  This year, when it arrived, temperatures were in the mid-70^o’s, with lots of sun and balmy spring breezes.  Spring means the daffodils are up and the trees are in bud.   

Just when we took off our jackets we were shocked back to reality when the temperature dropped enough to give us snow flurries.  We shivered and asked, “what happened here?” and “I am so tired of winter” and “I worry whether summer will ever get here.”   It can and does still get cold in April.  This is no surprise. After all, it is spring and it is April.  Cold or snow are not out of the ordinary nor are they totally unexpected.  This is the way that the seasons work.  It is in their nature. 

In the scheme of things financial, we need cash to meet our living needs.  “Cash” ranks up there with oxygen.   In order to get that cash to meet our living needs, we have two choices, “It is either man at work or it is money at work.”  The simplicity of money at work is that it works 24-7 through our investment portfolios.  With a well constructed investment portfolio, we can reasonably rely on a long term rate of return (ROR) in the range of nine to ten percent.  After inflation and taxes, we need about 9% to 10% just to cover our living needs.  Investments work!   This is because people who place their capital into investments, do so because they demand a rate of return on their investment.  It is in their nature! 

It is the business cycle that drives the financial markets and short term rates of return.  Also, one must note, that there is a difference between short term returns and long term returns.  In the short term, RORs can swing wildly from very high highs to very low lows…sometimes so low, they’re negative.   No surprise, after all, it is in the nature of businesses to go through cycles. 

The negative part of the business cycle is usually only short enough to let the market fix things that went wrong during the early stages of that business cycle.  When the dot-coms went crazy, it was followed by a market correction.  Real state recently went through a similar boom.  It was followed by a Real estate crash and collaterally with it, a mortgage crash.  Frankly, if a bank lends money to someone who can’t pay it back, you (and especially the banks) shouldn’t be surprised when the borrowers walk away from their mortgage.  A crash is our collective way of saying “ ‘whoa’…you’ve been making some silly decisions lately…”  All corrections are part of the cycle.  It is in their nature. 

Back to the professor and his snake: After his unbridled enthusiasm, the professor realized the nature of the snake, and after the winter we realize that the weather in spring can have wild temperature swings.  So too with the market, it goes through these clumsy parts of the cycle.   

While we can certainly commiserate over the negative returns, we cannot be surprised that they’re a part of the cycle.  The good news is this:  better days are coming.  Warm sunny days are ahead and strong market returns are ahead.  After all, for the market, strong returns are in its nature!  

Good luck and may all your financial endeavors be successful. 

Entry Filed under: Financial Planning