The summer I was 18 years old (1994), I was a punk. You know, a cocky know-it-all teen who would rather stick a hot poker in his eye than respond positively to any authority figure. I was invincible. To say I learned several lessons the hard way that summer is an understatement.

But what might surprise you is that this near-death lesson of my youth gives us the perfect context through which to examine how we manage risk and when it is appropriate (and most effective) to transfer risk through some form of insurance.

We'll offer a Risk Management Matrix that will help us make better decisions in our finances and in life.

In this FLiP weekly you'll find:

• Financial LIFE Planning:
  • A Near-Death Lesson In Risk Management
• Quote O' The Week:
  • Seneca
• Weekly Market Update:
  • Reliving The Disco Days?

Financial LIFE Planning

A Near-Death Lesson In Risk Management

After a random Tuesday of lifeguarding followed by a host of “extra-curricular activities,” I departed for home in my gray Plymouth Horizon at 2:00 am.

Unfortunately, I entered my slumber prior to arriving and found myself trapped in the car at the bottom of an embankment with a visibly broken right femur, broken pelvis, and several internal injuries. (Fortunately, no one else was involved in the accident.)

It wasn’t until 6:00 a.m. that a truck driver finally spotted my car from above and notified emergency responders. The last thing I remember hearing was the sound of a helicopter and a voice saying, “This doesn’t look good. I don’t think this kid is going to make it.”

Over the next two weeks, the doctors and nurses in Baltimore’s legendary University of Maryland Shock Trauma Center, buoyed by the prayers of family and friends, work to save my life.

They said I was only minutes from bleeding to death in the car. Shortly after I arrived at the hospital, my left lung collapsed and plastic tubes were inserted to help me breathe. After fighting the machines that were providing my oxygen, they induced a coma, in which I remained for five days. I learned later that my chances of living fell below 10%. As a financial planner, I should point out that those are not favorable odds. Friends and family were summoned to pay what was likely to be their last visit.

Good news, though--I made it. And however painful an experience, this trial has provided a font of lessons learned that has yet to run dry. Here's one:

Objectively speaking, my near-death experience is a classic case of horrendous risk management. There are four primary risk management techniques:

1. Risk avoidance
2. Risk reduction
3. Risk assumption (or self-insurance)
4. Risk transfer (or insurance).

Viewing my accident through the lens of a risk manager, this was a risk that could’ve been easily avoided by simply NOT driving at 2 am after a day drenched in sun and, well, other stuff. Or, the risk could’ve been significantly reduced by asking for a ride home or at least wearing shoes and a seatbelt. Instead, the decision I made was to assume all of the risk, personally. Thankfully, the financial risk was transferred to auto and health insurance companies—otherwise, I’d still be paying the bills.

But prudent risk managers don't jump to insure, before ensuring that they've expended the first three techniques prior to pulling out the checkbook (remember those?) That's because if you attempt to transfer all of your risk by purchasing insurance for everything for which it was created, you won’t have any money left.

You manage risk, however, every day whether you know it or not. Do you wear a seat belt? You’re managing risk through risk reduction. Are you a boater? You’ve made a risk management decision, electing to assume additional risk. Have you never smoked a day in your life? You’re a risk manager, avoiding one notable cause of early death. A greater understanding of risk management techniques will help you make better decisions in life, and with insurance.

You’ll know when you need insurance or need better insurance, and you’ll also know when you need less or no insurance at all. Proper risk management results in less stress—because you’re not wondering about issues you haven’t addressed—and a healthier personal bottom line.

It’s no accident (pun intended) that risk transfer—or purchasing insurance—is the last technique mentioned in the risk management matrix. When we’ve effectively managed risk through avoidance, reduction, and assumption, we can save a tremendous amount of money over our lifetime paying a premium to have risk transferred.

Here's a simple guide that will help you remember the steps for optimal risk management:

Quote O' the Week

Seneca

Weekly Market Update

Last we broke the losing streak. This week, not so much.

• - 4.77% .SPX (500 U.S. large companies)
• - 4.24% IWD (U.S. large value companies)
• - 4.49% IWM (U.S. small companies)
• - 3.93% IWN (U.S. small value companies)
• - 1.78% EFV (International value companies)
• - 3.54% SCZ (International small companies)
• - 0.80% VGIT (U.S. intermediate-term Treasury bonds)

Reliving The Disco Days?

Contributed by John Marske, CFP®, a Notre Dame grad and generally good guy.

By now we should know the week in which the monthly inflation data (CPI and PPI) is released is going to be volatile. Admittedly, I was surprised by the strong rally on the Monday before the CPI report. Most of the major indicies were up more than 1%.

We seem to be in a pattern where the market tends to rise and fall with momentum that continues for consecutive days before reversing. Monday marked the 4th consecutive positive day for the markets. The markets anticipated that lower gas prices and slowing home sales would lead to a lower inflation report. The markets were wrong.

The August CPI report, released on Tuesday, suggested inflation is far from under control. Although the top line number of an 8.3% annual inflation rate is down from the 9.1% June peak, it was higher than the 8.0% forecast. Despite a 10.6% decline in gas prices, increased prices for shelter, food, and medical care accounted for the elevated rate of inflation.

Food prices increased by 0.8% in August, following gains of 1.1% in July and 1% in June. Shelter prices rose 0.7%, following a 0.5% increase in July. Increased costs to medical care also nudged up by 0.7% in August, following a 0.4% increase in July. So, while the top-line CPI number was only up 0.1% on the month, the core CPI number (less food and energy) was up 0.6%

This hotter-than-expected report shook the stock and bond markets. The S&P 500 opened down 2% and continued lower, falling 4.3% by day's end. The Dow index fell 1,276 points on the day. Two-year treasury yields jumped 20 basis points, to 3.76%, while ten-year yields increased six basis points, to 3.42%. The market still believes a more aggressive Fed will push us into recession and the Fed will eventually have to cut rates.

Tuesday’s sharp U.S. selloff in equities was the second time in less than three weeks that stock investors have been badly burned in a single day. The closing level of the S&P 500 (3,932) was basically back to where it was the previous Tuesday (3,908), wiping out the nice four-day rally the markets experienced going into the release of the CPI report.

The fact that we stopped the bleeding on Wednesday was encouraging. Wednesday’s Producer Price Inflation (PPI) report was more in line with investor expectations, falling 0.1% over the previous month. Nonetheless, the core PPI (less food & energy) rose 0.4% for the month, a bit higher than the 0.3% expected. Stocks ended the day with gains of 0.34% for the S&P 500 and 0.38% for the Russell 2000.

But the selling continued on Thursday and culminated on what might be called “FedEx Friday.” While we started out positive on Thursday, the rally quickly fizzled. The retail sales data released on Thursday was surprisingly strong. However, the main cause was a jump in pent-up auto sales. Excluding autos, retail sales fell 0.3%.

One long-time stock favorite, Adobe (ADBE) got hit especially hard on news of a $20 billion planned acquisition of a design software company named Figma. The company was founded in 2012 and was valued at $10 billion in its last funding round in 2021. ADBE stock was down more than 20% at one point, ending the day down 17%. The selling in ADBE continued on Friday, with the stock ending the week at $299. This stock was trading at $699 last November.

On Friday, the spotlight was on Fedex (FDX), the large shipping company, after announcing dismal earnings. The stock fell more than 21% on Friday. Transportation and shipping companies are seen as leading indicators of the global economy. FedEx officials said their results were particularly impacted by economic weakness in Asia and service challenges in Europe.

In sum, the major stock indicies registered one of the worst performing weeks of 2022. This was the fourth losing week of the past five, making the labor-day shortened week look like nothing other than a bear market rally.

The Federal Reserve holds its FOMC meeting next Tuesday and Wednesday. The market fully expects another 0.75% rate hike. If the Fed delivers as expected, this next rate hike will mark the most tightening by the Fed in a single year since the 1980s.

Disco was at its most popular in the late 1970s and early 1980s. We really don’t want to relive those days. Rock on.

Remember when we thought the styles from the late 70s and early 80s would never come back? Well, let's hope we're proven wrong on inflation, anyway. Have a great week!

Tim

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Oh, and BTW, The information in this article is for educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. That should really come from your financial advisor. I'm thrilled to work for Triad Financial Advisors, but what I write is my opinion, and not necessarily theirs.