How to "Bear" a Flood

 Max Starke Dam on Lake Marble Falls, Tuesday 10/16/2018.

Max Starke Dam on Lake Marble Falls, Tuesday 10/16/2018.

"Texas is a land of perennial drought, broken by the occasional devastating flood." -Unknown Meteorologist

An Olympic-size swimming pool contains about 88,286 cubic feet of water. On Tuesday, October 16th, I drove up to Marble Falls to witness what the equivalent of nearly four of those pools of water PER SECOND looked like as it flowed through and out of the banks of the Colorado River. As we stared in awe of the power of nature, I was also reminded of the comfort that a sound plan can provide.

We had awoken to the news that morning that flood waters were rising around the Highland Lakes area of Central Texas. The Hill Country had received several inches of rain on top of what had already been a wet month and the water had no place else to go. The local news stations showed scenes of flooded homes and roads. Perhaps the most spellbinding images were of dams being over-topped by the rushing water.

Then, as if the actual carnage needed any further drama, the meteorologist put up a computer model on the TV screen that suggested another foot of rain could be coming. If that were to come to pass, he suggested we could be facing a flood unlike anything residents of Austin had ever witnessed.

Fortunately, those worst case projections were not accurate. As it turns out, this flood ranked as the 5th highest since 1942 when the Mansfield Dam was finished to protect Austin from occasional floods such as this one. While it may be little comfort to those that have lost life or property, this was not a particularly unusual event.

This also isn’t the first time we’ve seen a flood in Central Texas that correlated to a selloff in the stock market. As I observed in the August 2015 Accountable Update, “Now What? After the Storm”, watching our portfolios drop day after day during a stock market downturn can be every bit as terrifying as watching the water level rise after a deluge.

I asked a friend whose house flooded last week if he had considered going up the night before to try and save any of his property. He said he had seen the rain forecast on the news, but there were no indications that he would be waking up to scenes of his boat going over the dam being broadcast around the country. By the time he realized that there was a flood, all he could do was hope that the elevated design of his house, with the ground floor consisting of only a garage and a bathroom, would spare him the devastation of seeing the living areas of his beautiful lake house being destroyed.

At the end of the day, he suffered. He lost his boat and boat house. He will have to shovel out mud and muck and repair or replace some other items. He’ll certainly be a few dollars lighter than before the flood, even after insurance pays out. But he’ll get it cleaned up and he will be back at the lake next summer, largely due to the designs he made when building the home on a lake that occasionally floods.

And that will be the case for those of us with money invested in the stock market after the selling is over. Instead of panicking every time there is a cloud on the horizon, we can go to bed knowing that with sound design, our portfolios can withstand these occasional storms.

As can be seen in Exhibit 1, stock market downturns of 10% or more are relatively common, but the rewards for riding out the downturns have far outweighed the short term losses that inevitably occur from time to time.


  Exhibit 1.  A History of Market Ups and Downs.  Chart end date is 12/31/2017, the last trough to peak return of 338% represents the return through December 2017.  Bear markets are defined as downturns of 10% of greater from new index highs. Bull markets are subsequent rises following the bear market trough through the next new market high. The chart shows bear markets and bull markets, the number of months they lasted and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown.

Exhibit 1. A History of Market Ups and Downs.

Chart end date is 12/31/2017, the last trough to peak return of 338% represents the return through December 2017.

Bear markets are defined as downturns of 10% of greater from new index highs. Bull markets are subsequent rises following the bear market trough through the next new market high. The chart shows bear markets and bull markets, the number of months they lasted and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown.

Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Source: S&P data copyright 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.


That doesn’t mean that we won’t lose money when the markets swoon, but with good planning, we should be well positioned to ride it out. If you are concerned about how you will make it through the next storm, get in touch to discuss your plan.