ETFs and Lessons From Hurricane Preparedness

Financial advisors and their clients can learn a lot from hurricane lingo. 

As we on the East Coast gear up for the storm season, and Southern California gets a rare taste of hurricanes thanks to Hilary, now’s a good time to discuss preparedness and wealth management. Hurricane season happens to coincide with what is considered by many to be the storm season for the stock market too. 

After 26 years in South Florida, I am quite fluent in “hurricane.” The path of a hurricane may be a metaphor for the threat of a bear market. Note the word “threat”: We don’t know until it happens, and advisors are paid to evaluate scenarios, not place bets like at a roulette table. 

A storm develops far away. Those that strike the Southeast U.S. typically launch from Africa’s Atlantic Coast. Unlike a market crash that whips up suddenly, we can see a storm develop and begin tracking it. That allows us to examine our preparedness and adjust if necessary. 

Financial storms are inevitable. Some can largely ignore them and let them pass without addressing much in their portfolios. With the season upon us, and fresh destruction in mind, now is a good time to remember that threats need to be confronted with communication, if not action.  

ETF Hurricanes and Financial Storms 

Weather forecasters have developed “spaghetti maps” that show a range of possible outcomes for an approaching hurricane or tropical storm. This is like the barrage of market opinions we sort through every day in making investment decisions.  

Those who have the best chance of defending against hurricanes, be it their homes or their investment portfolios, are the ones who make sure of two things:  

1) Get the “easy and obvious” aspects of the preparation done early 

With a hurricane, that means making sure doors are secured, powering up devices—things like that. For advisors, it’s running “tail risk” projections on existing portfolios, double-checking each client’s documented risk tolerance and examining common sources of portfolio risk (low quality bonds, richly valued stocks, portfolio positions that have grown to unhealthy allocations, etc.). 

2) Implement what you planned, instead of just planning to implement 

The thing about hurricanes is that much of the time, the portion of the potentially impacted area that gets damaged is small. Everyone prepares, but outside of the most severe storms (category 2, 3 and 4 hurricanes) that result in a direct hit to specific areas, the damage is often limited to lots of rain and cleaning up debris the day after. 

But sometimes, you find out that after casually watching a storm brewing for several days, you conclude that it is very likely coming straight for your neighborhood. That’s when plan B (evacuation, putting up additional home protection, transferring to someone else’s home that is more hurricane-proof) happens.  

In portfolio management, this is when you should be implementing what you planned, not planning to implement. Because the latter action is probably too late. 

Perhaps ETFs’ greatest feature, beyond low cost and liquidity, is how easily they help reposition portfolios in advance of market storms. The risk preparedness of a portfolio can be adjusted with a few clicks across all an advisor’s accounts. That is faster than any trip to the hardware store to stock up when a hurricane is in the forecast, and you don’t have to rush to beat the lines to fill your cars with gas.  

Those storms, and the preparation and forecasting behind them, reminds me of many aspects of managing other people’s wealth.  

So, as we enter the heart of hurricane season in the Atlantic, as well as in the financial markets, we hope the preparation is just precautionary. But for advisors facing economic and market uncertainties from many directions, their storm planning for clients will go a long way toward keeping their advisory practice from flooding.