In those long-forgotten, pre-Covid days, I was typically on the road anywhere between two and five days a week.
I am a pretty comfortable flyer. But on more than one occasion, especially when taking off in bad weather or on a dodgy airline (sometimes a combination of both!), I would ask myself:
I mean, accidents happen.
Before you ask, yes, I am very familiar with the stats. I am well aware of the fact that flying is much safer than driving.
Then again, I haven’t owned a car for about ten years now. And while flying may be safe on a relative basis, I’m not exactly improving the odds every time I board a plane, am I?
Now, as unfortunate as dying in an airplane crash would be, I feel well covered on that front.
I’ve got a sizeable life insurance policy, which I’ve been increasing as our family grew in size. In addition, my deferred bonuses would continue vesting if something were to happen while I am traveling on business.
Just as importantly, my wife is fully clued up on our financial matters and we discussed a contingency plan in the past.
But the broader point still holds.
Oftentimes, we are so focused on solving for the upside (i.e. building wealth) that we forget to protect the downside – with dire consequences.
Mercifully, the list of things that one should really worry about is quite short. To me, it’s:
- War or another existential crisis
As far as the first two items go, see above. Sure, crap happens.
However, such crap is rare and can be effectively managed with an insurance policy.
Then there’s what I call self-inflicted disabilities. The kind of health deterioration that inevitably happens when people don’t look after themselves (and I’m certainly guilty of this one myself).
Not much to say here either, other than to suggest staying active, watching your diet, and avoiding stress. Extra points for not smoking, keeping a moderate alcohol intake, and saying no to drugs.
There’s zero point in getting rich, only to realize that you can’t enjoy the money anymore.
Divorce is the next big one, and it definitely deserves its spot on that list of gnarly outcomes.
Put simply, divorce is NEVER good news. Your choice of a life partner is probably the most important financial decision you’ll ever make – except you don’t even realize you are making one at the time.
But people do get divorced. Just because you made a bad decision in the past doesn’t mean you need to stay in an unhappy (or worse) relationship.
Exit quickly, and hopefully amicably. The costs of divorce proceedings go up exponentially once lawyers get involved.
And once you are in the clear, try not to make the same mistake again.
Finally, there’s war. Most of the readers of this blog are from countries that haven’t experienced war for generations. Chances are, that will remain the case.
Sadly, not everyone is so lucky, and nothing can destroy lives and livelihoods quicker than armed conflict. There’s a reason that money (i.e. investment) loves peace and quiet.
There’s also a reason why so many people who make their money in emerging markets tend to have a second base of sorts somewhere in Europe or the US. Housing prices in London and NYC are not an accident.
The Long Tail
Once you get past the short list of really bad outcomes, you can turn your attention to the slightly longer list of risks that could just as easily torpedo your financial situation.
For the avoidance of doubt, I am not talking about market crashes.
Much better to focus on things that allow us to survive those inevitable crashes – and stay in the game for as long as we can.
Leverage is the biggest elephant in the room. When the times are good, amplifying your returns with some debt seems like a total no-brainer.
But leveraged investing is like one of those really sharp Japanese knives. Very helpful when used properly – and just as dangerous in inexperienced hands.
Then there’s diversification.
As hard as that is to believe, the vast majority of stocks actually underperform Treasury bills over their lifetimes.
The few that buck the trend, outperform by an absolutely astounding degree and power the magic money machine. But… good luck identifying them before the proverbial home run.
Investors who build their wealth through index funds are usually okay on the diversification point. It’s part of the package.
However, there are a lot of people who build wealth outside the stock market (i.e. entrepreneurs) or simply inherit it.
If you are in that camp, it’s worth remembering one of the fundamental rules of money:
You make money with concentrated bets – but you protect money with diversified ones.
Finally, for those of us relying on the good old nine-to-five, a big potential curveball to watch out for is a layoff.
Not critical if you are in the right industry with the right skill set, and just happen to be working for the wrong company.
A healthy dose of networking (ideally before the event) can help you land on your feet.
Much more challenging if you are highly specialized and happen to be stuck in an industry in a secular decline.
The very reason some jobs pay more than others is that they come with inherent downside risks. Keep your eyes open and be honest with yourself, as retraining and repositioning yourself can take much longer than you think.
Glass Half Full
The above might strike you as a very pessimistic perspective. Allow me to disagree.
It’s tough to go through life without setbacks. Bad things can and do happen, to good people.
The good news, of course, is that the list of catastrophic risks you will face in your life is pretty short.
Instead of avoiding them, acknowledge them. Run a pre-mortem on your financial situation. Hedge the downside.
And once you are done, you can focus on the upside – with a clear, peaceful mind. Trust me, it feels great.
As always, thank you for reading.