By Brad Thomason, CPA
Today I wanted to mention a risk we all need to be on the lookout for. I’m using the definition of risk from the insurance perspective: something that might go wrong and create a loss. ‘A building might burn down’ is a risk; ‘a building did burn down’ is a casualty (i.e. the thing that could have gone wrong actually did). Even though there’s a financial slant to this, I wanted to clarify that I wasn’t referring to the nebulous idea of investment risk, at the moment.
Over the next few months we’re all going to be seeing news articles that talk about this statistic surging or spiking, and that statistic plummeting or something like that. Frequently these will be accompanied by robust amounts of speculation as to what these developments mean. There’s always some volume of content like this out there at any time. Sort of a type of background feature that’s just part of living in a world where writers are competing for eyeballs, and some of them are willing to use exaggerated (ahem, misleading…) language to get them.
But right now the likelihood of such stories is greater. Why? Because we’ve just come through a period of legitimate upheaval, and when this year’s measurements are compared to last year’s, there really will be some big changes.
In fact, we’re already starting to see them. Movements in things like the price of gold, the price of oil, yields on Treasury bonds, changes in unemployment figures – all of these are showing percentage changes which are big enough to draw attention.
But the question is do these types of changes actually matter?
But keep in mind that the main reason people track changes from one period to the next is to hunt for clues about the direction of progress, or to get early detection about changing conditions. Implicit to such approaches is the assumption that the world has been rocking along in a type of equilibrium (a term I’m borrowing, this time, from the economists’ dictionary) and that a change in one measure or another may signal some sort of disruption to the equilibrium. The reason people look for things like this is to a) take defensive action to protect gains that they racked up during the preceding calm, or b) to get in position for some new opportunity which may be about to come along.
Would you classify the year we’ve just had as calm or an equilibrium situation? Me neither.
Which is the point. The data that came out last year, when compared to 2019 (i.e. back when there was still an equilibrium), gave us a gauge as to the extent of chaos that the pandemic was causing. But now, the fact that the pandemic caused chaos, is old news. Using the tools of calm-transitioning-to-chaos, as a means to measure chaos-transitioning-back-to-calm (we hope) is a mistake waiting to happen.
The risk is that the language of headlines and the degree of movement in a particular statistic causes us to lose sight of the broader situation. If something doubles from a period of stability, that’s probably noteworthy. If something doubles because it cratered last year and is merely resuming pre-event levels, though? Likely a lot less important. Which in turn means it should count a lot less in making decisions and taking the follow-on actions that such decisions suggest.
Effective analysis for the rest of the year may come about by looking at the numbers less closely, rather than more closely. Not to mention tuning out the various prophets of doom or revolution. We should not be surprised by outlandish comparative measurements for the next few months, we should expect them. Something to keep in mind as you steer your finances while life moves past the pandemic.
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