IN RECENT WEEKS, I’ve focused on some of the growing risks in the financial system. In the stock market, there are day trading enthusiasts and their obliging brokers. In Washington, there’s a Federal Reserve that has served up a seemingly bottomless punch bowl of new money.
Result: Despite the current recession and 11% unemployment, the stock market is close to its pre-coronavirus all-time high, fueled in part by the Fed’s policies, which have driven income-starved investors to take greater risk. Meanwhile, the federal budget deficit has gone into the stratosphere—in June alone the deficit was $863 billion, up from $8 billion last year—and the Fed has printed about three trillion new dollars.
A reader asked which posed a bigger risk, an overeager stock market or an overspending government. My response: These risks aren’t the only risks. In fact, the worst risks are the ones we aren’t currently paying attention to. Risks that catch us by surprise are, by definition, the ones we’re least prepared for. Below are just a few examples. Some of these represent risks to the entire system, while others may impact us individually.
Cybersecurity. Talk to folks who work for financial institutions, and they’ll tell you that their computer systems are attacked every day. Fortunately, most attacks are unsuccessful. But I worry about a situation where a major bank’s systems are compromised. The result would be chaos, even if the problems were eventually sorted out.
Identity theft and other types of fraud. In the past, I’ve mentioned Peter Willmott, the former chief executive of Federal Express, whose own bookkeeper stole nearly $10 million from him. Ulysses S. Grant, a former president, found himself bankrupted by a Ponzi scheme late in life. Fortunately, these are the exception rather than the rule, but they illustrate that fraud can affect anyone.
Litigation. Travel down a highway in many states, and you’ll see billboards blanketed with ads for attorneys. “Injured? Call us!” If you’re a physician or a small business owner, litigation is a perennial risk. But the fact is, it can impact anyone who owns a home or drives a car.
Political risk. Ever since the 2000 election got hung up in litigation, I get a little nervous in election years. The reality is that financial markets are mostly agnostic to political parties, but they hate uncertainty. To have the Oval Office hanging in the balance may be the worst kind of uncertainty.
Tax risk. For high-income families, there are three taxes to fear. The first two—income taxes and estate taxes—are both scheduled to increase automatically in 2026, but a change of political power in Washington could easily accelerate that timetable. Meanwhile, the third tax—a wealth tax—doesn’t exist, but the concept has been getting more airtime in recent years. Two presidential candidates made it part of their platform this year. In Los Angeles, a teachers’ union promoted the idea in a white paper issued last week.
Beyond these somewhat conceivable risks are what many call “tail risks”—probably much less likely but potentially far more harmful. These include war, terrorism and the entire universe of unknown unknowns.
If this list seems a little overwhelming, that’s not surprising. The human brain has evolved to become very good at focusing on one thing at a time. Research, in fact, has shown that we’re terrible at multitasking. It isn’t realistic for anyone to simultaneously worry about the current pandemic, while also keeping an eye on the Fed, the election and the stock market—not to mention war, terrorism, climate change and everything else. (That’s probably why, in April, little attention was paid to a Pentagon statement acknowledging “unidentified aerial phenomena.”)
What’s the solution? As I said last week, there’s no magic bullet. But here are four things you can do:
Adam M. Grossman’s previous articles include Fed Up, Two Reasons to Worry and Too Slow. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.