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February 19, 2014

Can the Polar Vortex Explain Your Retirement?

3 Truths for the Proactive Investor from the World of Weather Forecasting

A recent article in the Wall Street Journal by Ben Eisen highlighted ten things that a person may not know about weather forecasting. This article was obviously easy pickings for the writer. The average joe around town knows more about the now inexplicably famous sport of curling than he does about how it rains. Being one of those ignorant ones, I slid my stone in (that was a curling reference, thank you very much) to get educated. As it turned out, the lessons learned seem to be equally ubiquitous in the retirement business. Which, I guess, was only to be expected. If there’s two topics I can’t stand listening to my Uncle Fred soliloquize about, it’s weather and retirement planning. Go figure. In any case, here’s three truths about the weather business that can inform your retirement.

Weather Truth #1 - Weather Forecasting is Big Business

How big? How about $6 billion big? Yes, your local underpaid weatherman is a tiny cog in a massive industry. There’s money in the obvious places – media consumers, paid apps, paying Uncle Fred to stop talking for a few minutes – but there’s also a lot of interest from the other side. There are many industries that rely on accurate weather predictions, (e.g. farming, trucking, and sports,) and their profits rely on accurate forecasting. Some estimates place the combined financial interest at $3 trillion. (A price similar to the Knicks season tickets package.) Of course, the lesson for retirement is easy. The retirement industry is also a big business. How big? How about $4 trillion big? Let’s face it; nobody is taking care of your funds without a big financial incentive. Identifying how the retirement companies are making their money off of you, and how much exactly is being funneled out of your account, will provide a solid base in your choice of platform.

Weather Truth #2 – The Polar Vortex is Not a One Time Phenomenon

Normally the polar vortex stays where it’s supposed to be, which is (obviously) around the poles. However, as those of us on the East Coast well know, that insidious weather system can suddenly descend and make everybody look down, speak curtly, and shiver our way past all normal human interaction. (It’s sort of like the New York experience for out-of-towners.) What most people don’t realize, though, is the regularity of the Vortex. It comes every 5-10 years. This is certainly not our first experience with it. Still, that hasn’t stopped the media and weather professionals from trumpeting it as a major black swan. Which is exactly the language that financial professionals use when describing catastrophic market occurrences. “Yes, the market tanked, but it was due to unforeseeable events in the (choose your own) sector.” The thing is that these financial black swans happen with quite a regular frequency. In fact, a number of serious financiers have made even more serious money by relying on the regularity of crashes. Investors have to expect that at some point the market will fall in a big way, and unless they’re diversified beyond market products, their funds are going down with it.

Weather Truth #3 – Snow is Hard to Predict

Rain? Not so bad. Temperature? Pretty darn accurate. Snow? Well… let’s just say you take your chances. The reason for this is that the amount of snowfall can vary greatly based on minor atmospheric differences. To make matters worse is the snow/rain conversion. One inch of snow is equivalent to just a tenth of an inch of rain. So that means although we won’t necessarily realize the difference between a ½ inch and an inch of rain, we’re definitely going to realize the difference between 5 and 10 inches of snow. Stocks are similar to snow in that way. You have a lot of solid sounding predictions, but in the end most of them are way off base. There are just too many contributing factors that can sway a stock price to be able to incorporate all of them in a meaningful way. This is not fun, but it’s only to be expected. If somebody could really predict stock prices, they would certainly not share that information with you. In the end you can’t do anything about the weather, you can’t really do anything about the stock market, and sometimes it just pays to go in a different direction. (Especially if that direction is away from Uncle Fred.)


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