BUZ LIVINGSTON: 100 years ago the lights went out

Published: Wednesday, July 23, 2014 at 03:21 PM.

In July of 1914, the Austro-Hungarian Empire invaded Serbia kicking off a four year conflict we call The First World War. In addition to over twenty million deaths, The First World War was merely the first half of even greater conflict twenty years later. When Austro-Hungary attacked they were one of the most powerful nations in the world but a poorly executed war led to its downfall. In a recent Motley Fool column John Reeves pointed out several lessons investors can glean from The First World War.

Avoid huge bets where the probabilities of failure are unknown. Recently a young client considered a business proposition involving a vacant lot. For several reasons buying another piece of property was a big gamble. Anything with a 401K loan is fraught with peril. More importantly on the personal front the proposal was even more risky. Money can be replaced, marriages not so easy. 

Reeves points out how the folly of short term thinking can lead to disaster. In 1914, Germany preemptively attacked Russia but in four years the German Empire ceased to exist. Today, the greenback dollar remains the world’s most sought after currency. When Russians (sorry y’all, no way ragtag militias can operate sophisticated surface to air missiles) shot down the airliner there was a rush to safe havens, primarily the US dollar. Yet to score political points, members of Congress appear oblivious to the danger of debt default. The dollar being the world’s reserve currency gives the United States economy a tailwind the rest of the planet envies.

With the stock market setting new records investors should never forget a catastrophe can derail retirement plans. If your plan depends on eight percent returns like many pension plans do (hello, South Walton Fire District) or 10 percent returns like Dave Ramsey touts, both of these are far from certain. You won’t get a do-over on retirement, it’s one and done. Not only did World War One cause the Austro-Hungarian Empire’s demise, the German and Russian Empires met a similar fate.

Market risk (systemic as the academics say) can be diversified somewhat by using different asset classes and having a long term horizon. But systemic risk cannot be avoided. Outlying events, so rare they have a special name, black swans, are hard to predict and can decimate your portfolio.  It’s important, even with lofty stock prices, to keep some money out of stocks. From August 1914 to December 1914, the New York Stock Exchange closed. Good luck getting your money out.

According to family lore, Great-Granddaddy Hodges made $100,000 selling corn in 1914 ($1.9 million in today’s dollars). He was a sawmill/turpentine operator but with Europe hell-bent on war, American farmers reaped unforeseen profits. A few years later their sons paid a terrible price. Dad visited a World War One cemetery and found a corner of a foreign field that is forever Georgia .  Even though this soldier could not vote in Georgia , he could be drafted and answered his nation’s call.  When Dad tried to buy flowers for the grave, the storeowner refused his money. 

Even though Buz Livingston is a fee-only certified financial planner this should not be considered personal advice.  For specific advice visit us online at livingstonfinancial.net or at our new office in Redfish Village , 2050 Scenic 30A, M-1 Unit 230.

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