Recently I read an article contrasting the impact of the earthquakes in Haiti and Chile. The article noted that although the Chilean quake was 500 times stronger than the quake in Haiti, the loss of life and property in Chile was exponentially smaller. While there are many reasons for the difference, one of the most important is the Chilean building code. Chile has a lot of experience with earthquakes so they take their building code seriously. Haiti, on the other hand, had little concept of what an earthquake was. Prior to January, the last major earthquake to hit Port-au-Prince was in 1751.
Not that Haitian officials weren't warned. According to a report by the Associated Press, two geologists presented evidence in early 2008 to a group, including the prime minister, that a magnitude 7.2 earthquake was highly likely on the fault running beneath Port-au-Prince. Still, nothing was done to try to mitigate the looming danger. When the quake hit, people were totally unprepared. Survivors describe the terror of holding onto concrete pillars for protection only to have them disintegrate in their hands trapping them under the debris.
What happened in Haiti and Chile can teach us to be smarter with our investment portfolios. During the 2008 financial meltdown people looked to their portfolios to protect them, only to find them crumbling in their hands--sometimes literally. People were stunned that so much financial wealth could evaporate so quickly.
I spoke to a woman working at a garlic store in Gilroy the other day. When she found out I'm a wealth advisor she said, "I should have spoken to you two years ago. My retirement savings went from $350,000 to about $18,000." She explained, "I spent 35 years working for South Valley Bank and my 401k was invested in bank stock." She says she knew better, but the bank's stock had done so well for so long. She became complacent to the danger. When the 2008 financial earthquake hit, South Valley Bank's parent company, Pacific Capital Bancorp, was pushed to the verge of failure and her life's savings disintegrated in her hands like the concrete pillars in Haiti.
I spoke with another person who had made a fortune in real estate development. A couple of years ago his company had projects going up all over the western United States and his net worth exceeded $50 million--on paper. He lost it all in the real estate crash. Too much debt limited his flexibility and his personal financial empire imploded like a Haitian hotel.
On the other hand, some people were able to weather the 2008 financial meltdown because they built their financial lives on sound principles. One of these, a mortgage banker, saw his business revenues cut more than in half. Though he had to restructure his business, elminate some personal expenses, and dip into savings, he was able to keep his business afloat and retain the bulk of his portfolio. He and his business are now on their way to recovery. The 2008 meltdown was painful, but he was prepared for it and he survived.
Trials come to all of us and, when they do, you want your nest egg safe. Hot stock tips and soundbite financial advice are like Haitian building codes--they simply can't withstand financial earthquakes. Building on sound financial principles, however, is like building to modern seismic standards. The earth may shake and the tremblors may roll, but you can be confident that your nest egg will hold up.