Many people have a financial plan, but does that plan include preparation for something completely unexpected? Because things that have never happened before are happening all the time.

Do you remember Harry Truman? Not President Truman, but Harry Randall Truman. He had a plan and his story may illustrate the extreme of the unplanned emergency. But we do not know what could happen in the coming years. Please stay with this until the end when you will see the application.

Harry Randall Truman lived on the south end of Spirit Lake at the northern base of Mount St. Helens. He had owned and operated a recreation and fishing lodge there for decades. He called the mountain his friend and claimed to have a deep relationship with it. He considered himself an expert on small volcanic occurrences, like hot springs and tremors, and didn’t give them a second thought. As the precursors to eruption became more frequent over the course of 1979 and 1980, however, geologists told him he was living in the most likely path that potential lava flow would take should the volcano erupt. But Harry had convinced himself that everything would be ok. After multiple smaller eruptions and earthquakes, he said, “I think [the volcano] shot its wad.” And even if it did erupt, he “knew” the lava flow would be down the other side, away from his lodge.

Family members implored him to move, but Harry only said, “They’ll never get me off this mountain. Spirit Lake and Mount St. Helens are a part of me—they’re mine. They’re as much a part of me as my arms and legs.” Harry had his plan and he had evaluated the risks. He was happy and pleased with his plan.

On May 18, 1980, Mount St. Helens did erupt, and the north side of the mountain collapsed, sending a flow of molten rock down the northern side, right over Harry and his longtime home.

Mt. Saint Helens disrupted the local economy, but it had a minimal impact on the national economy of the United States, and it is likely the world economy felt nothing at all.

Mount Tambora on the island of Sumbawa in Indonesia erupted in April of 1815. The eruption was forty times that of Mt. St. Helens; it blew molten lava twenty-five miles into the sky. Modern airplanes fly around eight miles above sea level, but Mount Tambora launched dust, gas, and rock more than twelve miles into the atmosphere. The cloud of dust was so intense that clothes hung out to dry half-way around the world in New England froze. The dust hung in the atmosphere and blocked out the sun for so long that the corn crop in the UK was destroyed.

74,000 years ago, Mount Toba in Indonesia erupted with forty times the force of Mount Tambora, and it came close to ending human life. Toba, in fact, was formed from the same type of super volcano that created Yellowstone. The Yellowstone volcano was 53 by 28 miles in diameter when it erupted 630,000 years ago, and the landscape still reflects the impact of its eruption.

Things that have never happened before happen all the time. No one in 2019 could have predicted a pandemic which would kill over one million Americans and seven million people worldwide. Nor could they have anticipated the economic impact of such a black swan event.

No, I cannot say there will be another catastrophic volcanic eruption. I use those as examples of an event that cannot be prepared for and would send the economy into a spiral. It could be a comet or a terrorist attack using a nuclear bomb or deadly chemical gas. There are so many potentials, most of which I cannot even imagine.

All that to say that even the best of financial plans do not incorporate such events. That is the reason we believe our approach is the right one.

Our approach at Adams Financial Concepts is to focus on building what we call a margin of safety. We wish our clients to have more money than they ever expect to use. Most financial plans are built with a 95% probability of success – here defined as not running out of money in your lifetime. To achieve that goal, studies show the average annual return for financial planners is five percent (5%).1

Our focus is, over the longer-term, to achieve a higher return. Our client agreement states that our goal for our clients is to do better than the S&P 500 with dividends reinvested over a five- to ten-year period. We are willing to accept volatility for higher returns.

While our short-term returns recently have been worse than the S&P 500 TR, the five-, seven-, and ten-year returns and those accounts invested with us since 2005 have achieved that goal. What is the impact of our long-term investing strategy?

The composite of actual client returns since 2005 has been 9.41%, which means $500,000 would have grown to over $2.5 million. Whereas a return of five percent (the average for financial planners) would have grown that $500,000 to just $1.2 million. We believe that the difference provides a significant margin of safety in the event of black swan event.

When things that have never happened before do happen, having additional net worth provides a cushion. Of course, we have to say past performance is no guarantee of future performance.

Harry Randall Truman was happy with his understanding of Mt St. Helens. He was satisfied with his feeling that he was safe, and if the mountain did erupt it would not affect him. For decades the mountain had been steady and solid. He trusted what he knew. Harry did not feel a need for added safety. He had enough, in his opinion.

We know, in retrospect, that Harry was wrong. Don’t make the same mistake. Look to achieve higher returns and build a margin of safety.

1. Anderson, J. (n.d.). Coach through biases – yours and your clients’. SEI. Retrieved December 22, 2021, from https://seic.com/knowledge-center/coach-through-biases-yours-and-your-clients