Set Realistic Objectives
It’s not that simple, of course. Between what data to look at and what we can reasonably hope to do with that data, this simply gives us a starting point. For my own part, the first step has been setting realistic objectives as to what I can do. I can’t call a crisis, but I can study the data to find out what signs are most useful in predicting a pending one. Those are the ones we see in the monthly economic risk factor and market risk updates. That’s not enough, as I also follow current events and qualitative metrics, but it does give a quantitative framework to evaluate any other data. As for the objectives, I certainly can’t stop a crisis, but I can use those warning signs to steer around it.
Remain Humble
Looking at that last sentence, though, it bears a certain resemblance to what I thought Long-Term Capital might have said. And the truth is, we can’t know. So, the final piece is simply to remain humble in the face of uncertainty, and—this is the most important part—don’t take more risk than you can stomach if things go very wrong.
The Real Lesson
Risk, in the form of asset allocation, debt, or what have you, is what gets you into trouble. Even if our models and predictions fail, if we simply are not that exposed, the damage will be limited. That, in fact, is the real lesson of the great financial crisis: take less risk. That lesson is as timely and, I suspect, as unappreciated as it was in 2007, in 1999, or prior to any other crisis.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan.