Hurricane Amnesia

Here’s one for the glass is half full vs. glass is half empty debate:

As of today, it has been a record 118 months since the last major hurricane struck the continental United States, according to records kept by the National Oceanic & Atmospheric Administration’s (NOAA) Hurricane Research Division, which list all hurricanes to strike the U.S. mainland going back to 1851.

A major hurricane is Category 3 or higher hurricane. The last one to strike the continental U.S. was Hurricane Wilma, which made landfall in Florida on Oct. 24, 2005.

President Obama is the first president in 122 years, since Benjamin Harrison was in office, who has not seen a major hurricane strike the U.S. during his time in office. In a statement on its website, NOAA expressed concern that Americans might suffer from “hurricane amnesia.”

According to the NOAA, since the year 1900, there have been an average of 2.4 major hurricanes per year in the U.S. The fact that it’s been nearly 10 years since a big one has hit has some worried about how people will react when another one strikes. Hurricane amnesia can lead people to forget about contingency plans as some could ignore future warnings or calls for evacuation because they lose sight of the risks involved. Yet another example of how too much calm in the present could lead to chaos in the future.

Obviously natural disasters are far more serious than the markets or your personal finances, but there are some parallels here.

  • The markets are always surprising but at the same time they’re never surprising. The first question I heard from most of the individual investors I’ve talked to over the past couple of weeks since the market got a little dicey is ‘Should I sell my stocks now?’. No one seems to ask this question beforehand or worry about stocks until they fall. As my friend Morgan Housel opined this week, no one briefs the President after the markets rise 10% (Obama was briefed after stocks fell 10%…seriously). Let’s call this correction amnesia.
  • Studies show that anywhere from half to two-thirds of Americans would have trouble coming up with $1,000 in cash for an emergency. These financial emergencies usually aren’t really emergencies at all. Life happens and it’s always going to be something. Your car breaks down. It’s time for a new water heater. Little Johnny needs braces. You can’t plan on the exact cause but you can prepare for the possibilities by always having a reserve fund ready. Let’s call this one emergency savings amnesia.
  • Trading stocks is now cheaper than it’s ever been. Most fund companies allow for free ETF trades. At the most you’ll pay maybe $7 or so to a discount broker for a single trade these days. Investors assume that because commissions aren’t as much of a hurdle as they’ve been in the past that it makes sense to trade more. Problems from hyperactivity rarely have to do with the amount you’re paying in commissions. The biggest mistakes usually come from trying to do something when you should be doing nothing. Let’s call this one activity amnesia.
  • Technology makes it very easy to buy too much stuff you probably don’t need. Credit cards can be stored all over the Internet. You can find almost anything you want on Amazon and buy it with one click. It doesn’t really feel like you’re spending money when its so automatic. That reality comes later with your monthly credit card statement. Spending is more efficient but I’m not so sure this helps people stick to their budgeting or savings goals. Let’s call this one cash amnesia.

At times it makes sense to forget about the past an move on with your life. But this is a risky strategy with your finances when you lose sight of your big picture plans. Hope for the best but plan for the worst is always a good default.

Source:
NOAA: Hurricane Drought Hits Record 118 Months (CNS)

Further Reading:
Buying Insurance After Disaster Strikes

 

 
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  1. Gregory commented on Sep 05

    Build a simple buy and hold portfolio. Forget it and read a lot about history of the markets and passive investment blogs like Ben’s.

  2. Mixed messages scream at Yellen and co. | Vestact's – Quirk with quark commented on Sep 07

    […] I have read many articles recently (and before the market hiccup of the last month) that people have got used to the market mostly going up. The result is a false sense of security and then increased risk taking, which is a great way to sow the seeds of your distraction – Hurricane Amnesia. […]