I’m scared because our choices of president are so divisive and disliked (and that’s putting in mildly).

I’m scared because Vladimir Putin and Kim Jong Un seem to be increasing in power and influence, as are the odds of a large scale conflict, and it is not clear that the U.S. or Europe are doing a good job of reeling them in.

I’m scared because the U.S. stock market is still near an all time high even though we are likely still (depending on how this earnings season ends up) in an earnings recession that has lasted a year.

I’m scared of this chart, which I try to review about once every month or two.

core_overview_scatterplot

No one should take the above chart as an accurate predictor of future returns. That said, I think it appears to fairly capture, from a big picture standpoint, the relative risk and reward of investing in different asset classes at the present time. I’ve been harping on this for a while, but there are not many legitimate investment options right now, and it is probably a good idea to hoard cash or focus on paying down medium and high interest debts.

I’m scared because there are a few real estate markets that I work in that appear to be bubbly, particularly Nashville and Denver. We should all be thinking about investment real estate just like any other investment: if the property is overpriced, how many years worth of future income is being sacrificed by continuing to hold on to it, if the market were to correct?

I’m scared because all we need is a surprise with the election next week, or an incident in Syria, or a major cyberattack, or any of the other black swans out there that do not appear to be priced into the stock market, for the market to start to look like 2007-2008 again.

Okay, I’m not really scared of these things, but I am concerned. There is and always has been the risk of a black swan event causing a significant decline in asset prices. There are almost always asset classes in a bubble and others that appear to be undervalued. We all need to stress-test our investment methodologies and risk tolerance in general, and our actual investments in particular, to make sure that we won’t panic if our portfolios drop 20, 30 or even 50%. Investors who cannot stomach that kind of loss, or refuse to acknowledge that it could occur, need to revisit their investment plan. There are legitimate investment methodologies that are largely passive but attempt to minimize the impact of large bear markets, although they generally do not protect against large, rapid drops.

-Richard

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