During the past 20 years, we suffered 2 vicious corrections, 2000 and 2009. Attribution is simple. In 1999, tech stocks took off to the moon on the back of internet hype. Then, the combination of low interest rates, a love of real estate born of the prior equity bubble, mortgage securitization, and other factors led to soaring house prices. By 2007, houses were generally highly leveraged and overpriced. The collateral damage of the housing and mortgage crisis spread throughout the economy in ways few had imagined.

Which brings us to today. Allow me ask the obvious, what is overpriced today and which dominoes might prove vulnerable in a correction? Our artificially low interest rates and corresponding bond valuations seem the most likely candidates for disruptive movements.

The factors driving interest rates are complex, and countless financial instruments are tied to interest rates. This is not to predict economic Armageddon, but the dominos are set. There are paths to unwind QE without disruption, but we have not been down this path before. We can hope the path to normal will not be too disruptive. I am acutely aware of what I don’t know, but I have an idea where it might come from. This is fat tail risk.

When liquidity is important, it is important to reserve for it. If managing volatility is important, you might pay a steep price to hedge. Much like the crisis of 2000 and 2009, this one, if it occurs, will likely pass within a few years. I suggest reserving for liquidity needs anticipated within 3 to 5 years, and staying the course with the balance. Manage risk, don’t try to avoid it (you can’t).