Important Financial Lessons from Hurricane Ian

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You may have read about or followed the trail of destruction caused by Hurricane Ian in Florida and up the east coast. The greatest damage was in Florida, and it has already been called the costliest natural disaster ever in Florida!

I have read several articles since the storm about people suffering total losses of their homes and possessions. Many of them didn’t carry insurance and many more were retired or almost retired, which makes their situation even worse.

Do You Need Flood Insurance?

To make matters worse, according to a Fitch Ratings analysis, only around 20% of residents in the flooded areas had federal flood insurance. Since, for many retirees, their financial safety net is their home and home equity, those folks are wiped out! This is a tragic turn of events that I hope none of my readers ever experience.

So, what can we learn from what those poor folks in Florida experienced?

Prepare, Don’t Predict!

In the couple of weeks leading up to landfall, I remember watching Al Roker discuss the formation of the storm and the likely track into the Gulf and hitting around the Tampa area. It was a few days before the landfall that they started discussing the change of path that turned it toward Fort Meyers.

Many were skeptical and chose not to evacuate and still others, like Sanibel Island were not given mandatory evacuation orders until September 27, the day before the storm hit. This left little time for escape, and many were left stranded there for days.

Instead of waiting for the mandatory order, had someone acted in the days before when it was voluntary, they would have been able to make plans, gather resources and weather the storm with much less displacement and stress.

How Does This Effect Me?

It seems that every part of the country has its own risks and challenges. These are not everyday things, but true disasters. Flooding in the Midwest (and severe snow and cold), extreme weather in the south, west coast earthquakes, fires and floods, northeastern snow, cold and ice. All of these can destroy property, cost money, and create stress.

To mitigate as much disruption as you can, plan ahead. Have an evacuation plan, make sure you have cash on hand to last several weeks (when the power goes out ATM’s and credit cards don’t work), pack an emergency “go” pack with basics and your important documents.

What You Can Do Now To Protect Yourself?

Make sure you review your insurance coverages periodically with your adviser or insurance agent. The time to find out if you have proper coverage is not after the disaster, but before. Most people think all policies are the same. For example, all homeowners policies are the same, so I just need to find the lowest premium. This simply isn’t true.

Florida had 6 companies go out of business BEFORE the storm and several others are likely to fail in the aftermath. Know the company and the limits of coverage. I find most have underinsured the replacement cost of their home and possessions.

Is There a Hurricane Forming In Our Economy?

There are lots of warning signs that many assets are extremely overvalued. I know we have seen a 25% drop in the S&P 500 and housing prices are dropping a bit, so you might think things are over. I was hoping to conclude the same.

I have been doing a lot of research and it is clear that by most metrics stocks are still trading at values that are extremely high relative to historical metrics. This would suggest that many stocks could go down more, especially if borrowing costs continue to rise.

Given the rapid increase in interest rates and inflation, companies that loaded up on cheap debt by issuing bonds over the past 20 years (and especially recently since rates were cut to zero at the start of the pandemic) might have trouble meeting their floating rate debt obligations and worse, refinancing their bonds when they come due.

There are likely to be some significant surprises in the next couple of years when some companies are forced to sell assets, reorganize or file for bankruptcy.

What About Real Estate?

The same is true in many areas of the real estate markets. We are seeing some drops in values in residential single family homes in different parts of the country as folks are being priced out of the market and sales activity declines, while inventories increase.

More concerning is in parts of the investment real estate world. Many projects were developed using very cheap money and may not be financially viable if the debt payments rise significantly from here.

For years I have written about how declining interest rates encouraged riskier investments as people needed to earn more from their investments in order to grow wealth and facilitate retirement.

This has led to higher valuations that can only work if interest rates stay low and more money flows into those assets so they continue to appreciate. It is pretty clear that after over 40 years of declining rates, that party is over.

Now Is The Time To Worry More About Losing Money Than Making It

For the past 40 years, you could move to bonds when stocks were doing poorly, and you were rewarded with appreciation as rates continued to drop. Once they hit zero in early 2020, there was nowhere to go but up.

That worked as long as they stayed low (did you lock in a 3% mortgage?), but now that they are rising, bonds are losing money with the average bond index fund down 15% so far this year according to NPR. Clearly, for now, stocks and bonds are moving together.

So, What Can You Do Right Now?

There are still alternatives that will work, but first you have to protect yourself by reducing your exposure to stocks that are vulnerable in the “new normal” as we are likely to see higher interest rates and inflation for the next period.

How long is anyone’s guess, but it isn’t likely to be over in a few months.

Ask yourself “what if this goes on for years”? Remember, “Prepare, don’t predict”. Thinks about the worst case and if it doesn\’t happen, you will still be fine, but if it does, then you will survive, where many won’t. Understand that yesterday’s winners may never come back if history is any teacher (remember People Express?).

If picking individual stocks is too much for you, and you want to index, be sure to do it where you have downside protection. I have used this kind of strategy for years, but it is more valuable now than ever.

Be sure to have access to cash reserves. This isn’t the cash in the mattress I suggested above, but cash that is available for the opportunities that come after economic recessions as the new order settles in. We saw this happen in the 30’s, 70’s and early 2000’s.

Review your insurance coverages for their appropriateness and the quality of the insurer backing those promises. Adjust deductibles and know specific coverage limits and whether they fit your financial situation.

In Conclusion

It is important to know that we are in a much different economic and financial world than most of us remember. For the last four decades, we have had dropping or low interest rates and inflation.

Those days are likely gone for the next 20 years or more. This is why we say “past performance is no guarantee of future results”. Please look ahead and not backwards in choosing your strategies going forward.

This is the time that financial advisers really earn their money. Take time to get with yours and ask them what they are doing to protect your financial security.

If you don’t have one, or want a second opinion, give us a call or contact us through our website. I want to make sure that current conditions prevent you from having a happy retirement!
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