In a letter to his shareholders in 2007—not long before the Financial Crisis—Warren Buffett said these memorable words:
You only learn who has been swimming naked when the tide goes out…
That’s a frightening sight.
And one that all investors should consider.
The stock market has gone up for several years now, with the S&P 500 delivering a total return of 85%.
Not without its dips, though. Notice those!
If there was a significant down year—even more significant than those dips—would your financial situation be able to handle it?
- How is your emergency fund?
- How is your investment allocation?
- How is your debt level?
You know I don’t predict markets, but history shows the upcoming quarter has been the best for the stock market in election cycles.
But one should always be prepared because the past never guarantees the future.
One of the things that made Mr. Buffett a good investor wasn’t that he always got things right.
He didn’t. I did a video on that mistake some time ago.
But his patience over time made Berkshire Hathaway one of the greatest success stories around.
Get this: Berkshire could fall 99% and still MATCH the performance of the S&P 500 since 1965.1
Warren was a wise investor. Remember his wisdom so you don’t get caught financially naked whenever the next downturn arrives.
But the opposite risk is just as real. Some are so convinced the tide will go out that they sit on the beach doing nothing—Mr. Grinch style—while inflation quietly erodes their purchasing power.
The million dollars you saved and didn’t invest for a decade buys a whole lot less than it did. That’s another kind of exposure. It’s a sneaker wave that knocks you flat on your face.
Living and leaving a legacy requires investing in that tension. Hold the warning while believing and acting in the hope of future growth.
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Source:
1. LinkedIn post by Michael Batnick. Accessed online.