04 Feb 2022
Investing
February 4, 2022 glacierinvest

Fragility is defined as the quality of being easily broken or damaged. With certain things, like glass, it’s easy to characterize them as fragile because it is well known they can easily be broken. With other things, like the stock market for example, it’s more difficult to say. One could argue the stock market is always fragile as it’s one unexpected event away from crashing suddenly. However, the stock market goes through phases of fragility and robustness, making it difficult to know what state it might be in at any given point in time. There’s no one indicator of fragility or robustness for the stock market but rather a collection of data points (not always the same ones) that can provide a framework for evaluating stock market fragility and robustness.

Over the past few years there have been many claims of stock market fragility, yet the market hasn’t broken and continued to move higher. I think that’s the right way to think about the stock market. While it is fragile, it’s unlikely the stock market will completely break. It may bend a whole lot and induce quite a bit of investor fear and panic selling, but it’s unlikely to completely break despite what some would have you believe.

So, when we talk about stock market fragility what we’re really talking about is our own personal financial and emotional fragility. How do we protect our own personal financial fragility? In the context of an investment portfolio, if we are retired and are withdrawing money from our portfolio for living expenses then there’s a real threshold of losses we can’t exceed without impairing our financial health. Our investment portfolio has to be constructed in a way that we don’t exceed the loss threshold. This requires a careful understanding of what that loss threshold is and what types of investments and allocation to those investments will keep us on the right side of the threshold. Additionally, there is this thing called sequence of returns risk which can wreak all kinds of havoc, requiring more dynamic income/withdrawal planning. I will discuss this later in the newsletter.

For those that aren’t close to or in retirement, emotional fragility can be a bigger source of concern as it can lead to fear induced selling at the worst possible time. We all need to understand what our pain threshold is for paper losses on our investment portfolios and seek to not exceed those thresholds. Like the approach to addressing financial fragility, if we can identify the pain threshold, we can build a portfolio that has a range of outcomes that doesn’t reach the pain threshold on the downside. There’s obviously no guarantee that will always be the case, but the portfolio can be constructed with a very high degree of confidence that the pain threshold won’t be exceeded.

Whether we’re attempting to address financial fragility or emotional fragility, the process is basically the same. We need to identify the financial or emotional pain threshold. Then, we can construct a portfolio, with a high degree of confidence (not 100%), that can keep us on the right side of the pain threshold we’re attempting to avoid.

Warranties & Disclaimers

 

There are no warranties implied.

Glacier Investment Management (“GIM”) is a registered investment adviser located in Kalispell, MT. GIM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. GIM’s web site is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of GIM’s web site on the Internet should not be construed by any consumer and/or prospective client as GIM’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Any subsequent, direct communication by GIM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of GIM, please contact the state securities regulators for those states in which GIM maintains a registration filing. A copy of GIM’s current written disclosure statement discussing GIM’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from GIM upon written request. GIM does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to GIM’s web site or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

This website and information are provided for guidance and information purposes only.  Investments involve risk and unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy.  This website and information are not intended to provide investment, tax, or legal advice.

Powered by