20 Apr Time to “Man the Ark?”

Our home more or less overlooks the Connecticut River.  When I say, “overlooks” I mean from a height of perhaps half a mile.  The last time the river flooded, I think it may have risen a dozen feet.  So, Jeanette and I were a little startled and somewhat perplexed to learn from one of our neighbors that they had purchased flood insurance on their home following Hurricane Irene’s visit (which, by the way, missed our neighborhood completely).

I have no idea what the price of flood insurance is for a home half a mile above the nearest body of water and atop a hill (no more chance of water running down to us from above than of it rising up from below).  Whatever the price for the additional peace of mind, it is too high.  It seems akin to the druggist selling sugar pills at the price of expensive real medicine.  You must charge the price for the placebo to be convincing, I suppose.

Isn’t it funny how extreme events, even those that are extremely rare, cause us to behave as if they were commonplace and apt to occur again in the not-too-distant future?  The financial crisis and consequent stock market collapse of 2008-09 was an example of just such an instance.  Most investors remain skittish about the stock market, fearing another once-in-a-lifetime crash, when what they should be worrying about is the other side of their portfolios.

Thirty years of declining interest rates and rising bond values seems to have instilled in most folks an unhealthy level of confident that their fixed-income investments still provide a safety net for their otherwise aggressively invested portfolios.  With interest rates clearly about as low as they can fall, most fixed-income investments offer practically zero upside and virtually unlimited downside.  Yet, folks keep buying them through mutual funds, annuities, and individual bonds.

This is the precisely the sort of human nature that sabotages most individual investors and convinces us to buy insurance the way we buy mega-bucks tickets.  Odds of a payoff – pretty nearly zero unless you happen to be the insurance company or lottery sponsor.

Now, don’t panic.  Just make sure the kinds of fixed-income investments you have in your portfolio are relatively short in duration, indexed to inflation, carry variable rates, or are otherwise buttressed to withstand a prolonged rising tide.