The refrigerator is empty and we are hungry. For most of us the solution is simple; go to the grocer and get food. If you were to model this it would be shown as:
Hungry Consumer >>> Grocery.
However, the food delivery network is not quite that simple. See the chart below.
The same complexities affect our finances. We might research a utility stock and select it because the company has strong management, an excellent balance sheet and growing earnings. And yet the value of that stock may fall because other investors are concerned that China may not keep growing as fast. Does our utility company sell electricity to China? No, but due to concerns about this unrelated network the value of all stocks, including ours, goes down.
How about this: The reason your bank certificate of deposit is paying 0.3% is because the Federal Reserve is keeping interest rates low to recover from a recession caused by a collapse in the value of derivatives traded by institutions that were used to hedge collateralized mortgage obligation issued by investment banks consisting of mortgages on homes primarily located in California, Florida and Nevada that were issued to less than stellar borrowers because of an easing of credit standards by Fannie Mae back in 1999 due to pressure from politicians. Why are you only earning 0.3% in the bank in 2014? Because of the actions of politicians back in 1999.
The problem with all this interconnectivity is it can be close to impossible to see a threat coming or to anticipate how an action in one network will affect a variable in another. This is why it can make sense to insure against the unknown. There are fixed annuities available that contractually guarantee that an income will never go down, regardless of what other networks do. There are other fixed annuities that provide an opportunity to earn competitive interest and protect the principal from the threats posed by other networks. It’s a complex world; fixed annuities make it all a little simpler.