Some people are preparing for the end of days. A fall or retreat of civilisation, linked to peak oil or the collapse of the global financial system or environmental disaster. Or whatever.
The solution is extreme diversification – up to and including living off-grid, or buying your own remote and defensible farmstead, complete with independent water supply, power generation capabilities, and the ability to feed your nearest and dearest until the smoke clears.
Anyone with an imagination is surely visited by such visions of the Apocalypse.
But the disaster scenario that preoccupies my mind is purely personal.
What are the chances that life will turn out as I dream it will – contented, productive, and blessed with good financial and physical health – without the intervention of some catastrophic event that leaves the long-term plan in ruins?
Financial disaster strikes
Whatever the odds, I’ve known a number of people who’ve suffered irreparable loss of income due to a bad roll of the dice:
- One was forced out of a job they loved by workplace bullying. Their loss of confidence has meant they’ve never returned to the same level.
- Another rose to lofty heights before being sidelined by management politics. Redundancy followed, and equivalent positions are often impossible after a period out of the workforce.
The trajectory of many other lives has been permanently damaged by misfortune such as:
- A rapid deterioration in physical or mental health – either their own or somebody near and dear.
- Loss of funds due to fraud, scandal, or naive decision-making.
- Loss of reputation or freedom.
- Divorce, addiction, abuse, or the death of someone they depend upon.
- Ill-advised ‘all-in’ investments/bets that ended in failure.
The foretelling
Whatever the cause, I doubt many of the affected thought it would happen to them, nor did they plan for it.
Because how can you plan for an ill wind?
I’m a relatively optimistic person – this post aside – but witnessing the casualties of life has caused me to assess my personal risk exposure to a reversal of fortune.
I don’t work in a job that exposes me to a high degree of accident or danger.
My health should be okay, too, especially given my family history, my familiarity with kettlebells, and my all-you-can-eat approach to vegetables.
But the industry I work in is being rapidly transformed by the creative destruction of the digital age. It’s an opportunity for some, but the inevitable outcome will be fewer people being employed doing what I do.
There’s every chance that I could get caught up in the fallout – my skills deemed obsolete, or at least worth a lot less in the era of globalisation.
Given the increased volatility of the global economy, I could be a casualty of a dip-of-the-curve sometime in the next five or ten years. And there’s no guarantee that I’ll be able to make good the loss.
Prepare for the worst, hope for the best
That’s a big part of the reason why I’m not relying on a 25-year plan to pay off the mortgage or an optimistic investment strategy that relies on my life going like clockwork until I can retire at 65.
I can’t plan for a quantum universe in which I’m struck by a debilitating illness1 when I’m aged 55 and 11-months.
But I can give myself plenty of room for error.
I’m saving and investing much more than I need to, by conventional lights. I want to do the hard work upfront while I still can.
The way I see it, by spending less on fancy caffeine now I either reach my goals more quickly, or I am better insulated against my personal apocalypse, if and when it happens.
Take it steady,
The Accumulator
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Yes, you can insure for some of these (I have life, critical illness, and inability to work insurance) but for the rest you’re right, it’s all about investment buffers, taking care with gearing, not letting your outgoings creep up to (and beyond!) your income, and reacting quickly to any change in circumstances.
(a)
“I don’t work in a job that exposes me to a high degree of accident or danger. My health should be okay, too, especially given my family history and my attitude to vegetables.”
(b)
“But the industry I work in is being rapidly transformed by the creative destruction of the digital age. It’s an opportunity for some, but the inevitable outcome is less people being employed doing what I do. There’s every chance that I could get caught up in the fallout – my skills deemed obsolete, or worth a lot less in the era of globalisation.”
two forecasts (a) and (b), reality is probably both are completely unpredictable, so it will be (a) that catches you out.
(a) is so bad its good – there’s a lesson in there; I prob misread the article and its meant to be ironic?
Good article – in my opinion, we tend to ask “can I afford this [now]” and don’t think about what can change over the course of a few years.
My toughest struggle at the moment is creeping outgoings, as Gadgetmind says – my key resolution this year is to keep tighter control of these so that I hit my monthly savings targets.
re-reading my comment it sounds a bit rude, apologies, not my intention – its a good thought-provoking article as always, for me beacause it shows the psychological tricks we have to play on ourselves to make decisions about stuff we can’t predict.
This post really hit home for me when I saw it in my inbox. Disaster aversion has to be the theme of this year for sure.
There is no solution to the end of days 😉 “No man is an island, entire of itself.” The other hazards, however, are specific to the individual, and your savings approach looks entirely reasonable to gain some self-insurance against those.
> There’s every chance that I could get caught up in the fallout – my skills deemed obsolete, or worth a lot less in the era of globalisation.
Indeed, which is why assuming a working life of in excess of 30 years is a dangerous assumption in the modern world 😉 Skills-wise this hasn’t quite happened to me, but they are worth less, and globalisation is continuously making working a more stressful experience…
my top5
budget–live within income
paying off all debt
emergency fund
pay off mortage
save/invest
i did none of these things until i hit 45
now i have no debt
i have an emergency fund
well on way to clear mortgage
since hitting 50—ive developed a few ailments healthwise—where before health was never a issue
i developed cervical canal stenosis-myelopathy—nerve damage to spine/neck
very painful to arm/wrist/swelling–like arthritus—its not chronic but i now have great empathy with those that have chronic ailments
so many took health as granted—as i did
1. We all need to consume, consume, consume…sensible and sober blog posts like this.
2. And then consume, consume, consume…Er…
if everyones predicting disaster you can guarantee it will be a great year
i’ll be taking the contrarian strategy of “buying high and selling low” in 2012
how can i fail?
@Ben — Cheers, no offence taken. For my part I’m always a bit defensive when I think people are at risk of over-complicating things. If a hedge fund can’t find mispriced long tail risk assets effectively, I highly doubt most of us can with any regularity.
I’m glad you’ve blogged about impending doom as it gives me an opportunity to ask about a presentation given by a guy called Chris Martenson?
He’s basically telling everyone about a financial and environmental melt down due to population growth, needed to sustain economic growth, resource depletion including fuels, climate change caused by CO2 emissions as a result of our exponential consumption and debt.
Here is the presentation he made at the end of last year:
Unfixable…Chris Martenson’s 40 minute presentation (plus 30 minutes of questions) at the Gold & Silver Meeting in Madrid
http://www.youtube.com/watch?v=8WBiTnBwSWc
It’s a compelling presentation and very convincing and taking in account the events of the past 3-4 years, it all seems to be unfolding as he says!
What do you think?
All, or some, of these things could happen, I agree. What I see as problematic is that the ‘big picture’ and the ‘personal’ are so inter-twined but there is no causality. In other words, there may be a global ‘near’ disaster and great opportunities for individuals. For me the key as preparation is not so much materia but mental. You may have an ample emergency fund saved and this be wiped out in a matter of a month by hyper inflation (just an example but it has happened not that long ago elsewhere in the world). Building the skills, networks and flexibility necesary for coping with extremes is what can guarantee survival.
but think how rich you would become if you had diversified out into other currencies.
As long as your holdings weren’t electronically traceable, since desperate governments tend to introduce capital controls and confiscatory regimes. You might want to hold physical gold, but remember even in the US Roosevelt criminalised private citizens’ gold hoards.
If you’re a Rothschild, you’ll have a way, but unless Monevator readers are exceptionally well-heeled I think we’d take that sort of hyperinflation collapse straight between the eyes financially 🙁 The story of Argentina ten years ago is also instructive.
@ermine… these are my thoughts… what do you think?
In the case of hyperinflation you’re going to find it more expensive to buy both foreign goods and goods made in your country that can be exported (since they can get a better price abroad). However, domestically sold items such as hairdressers will stay the same price to you (i.e. tourists find your services are cheaper, but you find other countries’ more expensive). You can see this by considering the price of goods in different countries, for some goods prices vary by country (haircuts), for others the price never changes whatever country you are in (phones and cars).
Hence you can invest against inflation, but not merely through a shares based approach. Firstly, if you are worried about inflation (which would be sensible) don’t get into long term fixed interest bonds of any form without inflation protection and only invest in companies able to compete globally.
Companies that can export what they produce, have enough commercial strength to pay good wages and maintain good margins and have a product in a non-declining industry are the goal. In the case of inflation, intangible assets are often a preference. I don’t see why domestic inflation should overly damage companies such as Coca-Cola, Apple, Pixar, Microsoft, Gillette, Amazon… so long as such companies are not reliant on credit facilities. If you want to be safe, buy some in different markets. Domestic inflation will create a more favourable export market for these companies which will help compensate for inflation.
The key is to not hold cash, fixed interest bonds or shares in companies that do not export goods. Instead you buy assets that should do a reasonably good job of retaining their value whatever outcome (heads you win, tails you don’t lose).
What tools do you use to draw these nice diagrams?
@ Ben – Heh, I expect you’re right. Something could hit me like a bolt out of the blue. I don’t discount it, and David Stuart’s comment affirms the point. An analysis like that isn’t really meant as a forecast but as a narrative that underpins a course of action. In other words, it’s easier for me to take a useful course of action if I can visualise a threat that rationalises the action. Loving your contrarian strategy 😉
@ Guy – I’m reading a good book at the mo that could help you with that: Your Money Or Your Life. It’s about achieving financial independence by reevaluating your material priorities. It has lots of ideas for aiding control.
@ David – I was a late starter too. What triggered the change for you?
@ Steve and Maria – Thanks for your interesting comments. Partly my thesis is that global threats appear so huge and irresolvable that as individuals we are powerless in the face of them. Powerlessness induces apathy or possibly even a frivolous response. By viewing threat on a more personal level, I think it’s easier to formulate a response and take action that hopefully benefits every aspect of your life.
@ Rob – aren’t all those hairdressers desperately jacking up their prices too so they can buy imported goods? I’m a little confused by your last paragraph which seems to warn against diversification. Are you so certain of hyperinflation?
@ Ahmed – it’s called Simple Diagrams.
@Accumulator
Go abroad to a poorer country and get a haircut and it will be ludicrously cheap. If hyperinflation happens things like haircuts will still be at normal prices to us against wages (since they can only sell in a domestic market which would then be relatively poorer), but to foreigners they’d be cheaper. So if you owned a hairdressers then domestically you don’t lose money, but considered on a global scale you’d be falling behind.
I’m not saying hyperinflation will happen (although I personal expect it at some point due to the trade deficit), but if you think it might happen as @ermine and I seem to think, you’d want to protect against it without using a strategy that will lose out if it doesn’t happen.
I don’t particularly worry about diversification. I buy good companies operating with good margins and paying good wages with superior products that can be exported globally. What do I need diversification for? I’m protected against inflation and if inflation doesn’t happen I own fantastic companies. If I wouldn’t put all my money in a company I wouldn’t put part of my money in it.
@Robert — You want diversification because seemingly good companies blow up every year, and there’s always fraud, too. Even Buffett diversifies!
I would never put all my money in one company, and I’m a relatively contrary risk trader comfortable being hugely overweight in equities. About 5% in a company is as far as I’d go. Maybe 20% in an ETF or fund. (If purely passive and required a 40% allocation to say UK equities, then personally I’d split it over two funds).
I wish you a blessed investing life free of disappointment that makes this note of caution sound overly anxious. 😉
@laylor
wise words fella 😉 – can you let me know what the very best company you have identified is (out of the set of good companies) and I’ll put all my chips on it…
@accumulator
hey i’ve read that book too, its a cracker on the subject of ‘enough’ and thinking about what/how you spend. You’re a smart cookie so you probably won’t be as taken with Dominguez on inflation and the return you might expect from governement bonds though, I think those sections let it down a bit. But overall I think its a good read. In a similar vein ‘Enough’ by Bogle is worth a look, and if you’re feeling really counter-cultural try ‘The Poverty of Affluence’ by Wachtel.
@TheInvestor
I probably good have better worded that. I don’t think you should put all your money in one company, but before I buy any company I ask myself whether if I had to put it all in one company would this be a candidate? You find fewer companies, but there should never be a need to sell these then like Buffet you diversify more as you get older, merely by almost never selling what you own. Furthermore, you should treat every company as if its the only one you own… diversification is a good thing so long as it doesn’t make you take your guard down. Focus on great companies not on finding many and in each buy with a margin of safety of their true value. There is a degree of useful diversification and there is compromising quality for quantity. Within what I suggest there should be enough room for diversification be it with inflation backed bonds or companies in several markets.
@Rob — Gotcha, sounds much better like that! 🙂
@ Ben – thanks for the suggestions, I’ll put ’em on the list.
that and an underground bunker
Debt isn’t always bad. I use cheap mortgage debt to leverage myself in the property market. At the moment I would be a fool to pay off 700k which costs me @ 2.5% on average. I’d rather use the money more productively.
I’ve started a business with a friend in the US lending to small businesses. As our rate of interest is upwards of 50% after bad debt, I’m going to take on cheap debt where I can.
Have you built any streams of income outside of traditional equity/paper investments?
As someone who is an engineer with 10 years experience but who has been out of engineering and in sales for 3 years – your career path can seem a bit like a one way track and who knows if it leads to a dead end!
ER is one destination that I am navigating towards.
> “The way I see it, by spending less on fancy caffeine now I either reach my goals more quickly, or I am better insulated against my personal apocalypse, if and when it happens.”
I get you. Equally however reducing one’s *actual* standard of living now, in the interests of a better *potential* future, is a strategy that (if overdone) could backfire.
A bird in the hand, and all that…
Just witnessed a friend with essentially no savings except the hope of the state pension, now at 60 seriously (i.e. terminally) ill, wife little better off healthwise. Hard to say they should have saved harder when younger.
Still you can’t plan for that and I agree with your approach.
Antifragile by Nassim Taleb is interesting reading about dealing with the unexpected.
I am 12 years out of my previous industry (precision engineering) the technology has moved on but curiously the craft skills I obtained earlier on in my career have become incredibly scarce because of technology.
Yet they are still needed… the get out of jail card, go back to work !
What helps me accept the risk of personal disaster is realising that it doesn’t really matter what happens to anyone, we prepare for the idea that we will die someday, so we accept that life goes on around us.
Even if planet earth got destroyed by a meteor, there will be life elsewhere, humanity is insignificant in the scale of things, the universe of billions of galaxies doesnt care
Now 72
Malthusian Armageddon statements are the lifeblood of the human condition
As it should be- if you made one mistake as a primate ape on the savannah you were dead never to pass your genes on
You feel the loss much more keenly of an investment mistake/loss than you do of a gain because of the same built in neurological pathway
However we now have a little more knowledge and historical awareness-so succumbing to these primitive feelings is to be avoided
If the “ship” is going down then we probably all dead (which we are in the long run anyway)
So have a Plan ,Save sensibly and do not pay much attention to Doomsayers
Life is for living while you have it
xxd09
Time spent as a volunteer at my local Citizens Advice has made me even more aware of the importance of having reserves against unexpected life events.
The main means tested benefit for someone assessed as having limited capability for work is £73 a week. This is subject to frequent reassessments though work capability assessments (WCA).
https://www.theguardian.com/careers/2017/may/22/cruel-and-humiliating-why-fit-for-work-tests-are-failing-people-with-disabilities
I have seen many clients with mental health problems driven to near crisis by having their benefits withdrawn or their claimant commitment changed, after a flawed work capability assessment. We can help them appeal, but this is a lengthy process due to the number of appeals lodged with the Tribunal Service.
Our appeal success rate is over 90% – a shockingly high % which underlines flawed WCA processes and decision making.
https://www.buzzfeed.com/emilydugan/most-dwp-benefits-cases-which-reach-court-are-based-on-bad
Having come from a very different (corporate) world with the benefit of an early retirement pension, redundancy package and having accrued substantial personal savings / investments, I still remain (after more than 5 years at the CAB) very unsettled by the plight of disabled clients who need our help to get their meagre benefits reinstated .
This exactly happened to me. Absolutely fine, running half marathons and was struck down at 50 with a rare and serious health problem that forced me to retire early. I think your strategy is good, but control is an illusion. You never know what is around the corner.
I have a similar attitude to planning, diversification, though not as extreme as doomsday prepping. (yet)
I like having margins of safety, and overlapping redundant systems to pick me up if I make mistakes – so i stay in the game.
The purpose of the margin of safety is to render the forecast unnecessary. Ben Graham
Isn’t this discussion a variation on the ‘risk appetite’ question?
We all constantly predict the future and make decisions based on those predictions. I modestly increased the size of my dried and canned foods store cupboard in the run-up to March 29th because there was a risk of disruption to food supplies that seemed reasonably possible. However, I didn’t go full survivalist two years worth of food and water and an arsenal of weaponry, because total collapse seemed unlikely.
I could have been wrong, but I chose to bet on this sheaf of possible futures, rather than that sheaf. Other people took other decisions depending on their assessment.
When I was involved in business strategy we tried to map possible changes in our environment on two axes, likelihood and impact. Low likelihood/low impact we tended to ignore. Higher likelihood/low impact could be dealt with tactically. High likelihood/high impact was where we focused most of our attention – what are we going to do about it! Low likelihood/high impact includes those notorious black swan events, and here the critical question was is there anything we can do? Can we reduce the risk, or are there early-warning signs we could watch for?
The point was where to put our limited effort. Yes, it could be a low likelihood/high impact black swan that killed us, but spending time obsessing about the very large number of possible LL/HI events and not giving enough attention to the HL/HI events we ‘can’ see will kill us just as quickly. We have to control the number of LL/HI events we worry about.
The allocation of possible futures to those four quadrants and deciding what you are going to do is a risk appetite calculation. In the end, when you have counted up all the historical evidence and looked at the world around you, it is a gut decision about what you believe and what you are going to do. It must be so as “prediction is difficult, especially of the future”. Do I believe that government regulation will move in favour of my business model over the lifetime of the product? Do I believe that historical GDP growth rates will continue in a climate crisis? This is how we place our bets.
Personally, I think I am going to die eventually and that would be bad for my family if they were still around, so I have a plan for that. My guess is that equity yields will be lower across the rest of my life so I assume a lower SWR than US history would predict. If I am wrong on the upside – bonus! If equities cease to exist as a viable investment I am wiped out, but that looks like it would require such an upheaval that I am not sure there is anything I can do about it anyway. That’s my risk appetite. One of the ‘fiat money is a Ponzi scheme ready to collapse’ enthusiasts would look at it very differently.
I don’t have a plan for a global pandemic, or hyperinflation, or large scale government expropriation. Again I am not sure what I would do if they happened, and I judge them low probability (in my remaining lifetime).
I do think the climate crisis is high impact and moving to higher likelihood, but those impacts are most likely to occur towards the end of my life. So I don’t have a strategy to handle the financial impacts of climate change, I don’t even invest in ethical funds, because I think that the market will force companies to deal with climate change risk (insurance companies are already putting the arm on some businesses as a result of sustainability issues). Instead, I work with and support businesses who are trying to solve the problem. I invest my financial capital passively and diversely, I invest my human and social capital actively and selectively.
My judgement is that as I look at the world around me, and add up my assets (house included or not!) I have enough. In fact, I am currently, and not without butterflies, spending some of my money on activities that are definitely not essential but that give me pleasure. After many years of accumulation, it is a wrench but I think it is time to enjoy some of it and I am not going to let putative black swans talk me out of it.
That is my bet based on my risk appetite.
Reckon if my family business was big enough to be nationalized, I’d probably make out just fine.
It can be hard to avoid disaster, especially if it strikes young, to avoid it requires such a huge effort for so little improvement of odds that arguably we’d be better off assuming all will go well and planning around that, I suppose this is about the guilt of feeling like you could’ve done more to mitigate the problem, but that’s like saying I’ll never drive in case I crash
Thank you all for your thoughtful comments.
Re: living life in the moment vs future planning:
What I’ve discovered in the years since I first wrote this piece is that they can be the same thing. I feel more secure now than I did on the lower rungs of the accumulation ladder. I’m closer to the target and that makes me feel happier right now. I’m less anxious about the future because I know our position is more resilient now. Not invulnerable, god no, but I’m not sweating a boiler breakdown. If I was made redundant we have an emergency fund. If I die then my partner would be secure. If I do lose my job and never get another one at the same level then our old age is already taken care of. I suspect that a large wedge of my Maslow triangle is shaded ‘Security’. Thing is I don’t look back on the last decade and see years of self-denial. I see a fair bit of personal growth because spending and happiness aren’t the same thing.
I’ve enjoyed this blog for a long time, but after seeing your comment about kettlebells and the link to Simple and Sinister I now know for sure I’m in the right place. I’ve often thought that kettlebells generally and S&S specifically are the exercise version of passive investing, and have noticed how both attract the same sort of person. My two top tips for life: Vanguard Lifestrategy and 100 kettlebell swings a day.
You raise a very good point.
When you are young and poor, you don’t really think about the need for disability or life insurance. That’s just stuff that happens to other people all the time.
Now solidly middle age I’m seeing the nasty rolls of the dice which leave people disabled or with permanent chronic disease which impairs their ability to work.
The problem is particularly acute in America where everything is totally screwed up and well insured people can still be driven to bankruptcy because of the vagueries of the system.
Your post really spoke to me as a confirmation of my plan.
Bit of background: I have Asperger’s syndrome and I find navigating the world is like goat trying to rebuild the engine of an Aston Martin DB9…with parts from a heavy haulage truck. The reason I mention this is because I’ve had a couple of jobs that ended badly. Partly to my own inability to navigate the corporate and social world. And partly to bullying and cliques. Both those jobs made me more deliberate and considered about having an escape plan if things go south again. This is my apocalyptic vision, or should I say nightmare or even better: shitshow.
With time I have become more guarded , my edges have been softened and I have been able to fool people that I am normal. My plan has been to save cash and going by the most common consensus that would be 6 month salary. I have already got 4 months in a high interest Help To Buy ISA as well as creating a portfolio of 75/25 stocks and bonds, which I add to every month and rebalance once a year (if I need to). My credit rating is now excellent and of course I read Monevator regularly. As well as reading great books like A random walk and Investing Demystified.
I see people at work take holidays, purchase Tag Heuer watches or, for a very luck few, buy homes. But this pales in comparison of the desolation of having no job, no money and no options. And judging by the latest research findings people with Aspergers syndrome struggle in later life so I am going to make bloody sure I am going to be an exception.
So I will continue with my strategy with milestones
• Get my emergency fund to that 6 months of salary
• Invest enough to have over £10,000 in my portfolio
• Opening a SIPP to make sure that magic figure of £301,500 figure I need to retire on
As for bear markets, climate catastrophes or other scary things like Boris Johnson becoming Prime Minister I will keep ignoring Mr Market and making sure every year I am getting closer and closer to my goals. And for some macabre reason I enjoy the game and for someone with my disability its comforting and relaxing (although I may revise my opinion if the stock market crashes!)
Hey Aspie, thank you for sharing and I hope you continue to power towards your goals. I prioritised my SIPP too and was amazed by the difference tax relief made. It’s obvious in theory but another thing altogether to watch it stack up. Are you thinking 3-4% withdrawal rate plus State Pension = decent annual income or are you planning on being very frugal?
A SIPP is an amazing vehicle for staying invested in since you cannot take money out. However, I am curious as to how the tax relief is crystallised. If I put £80 in June will the 20% be shown straight away? Also I have 4 pensions
Local Government Pension Scheme
NHS Pension
Barclays
NEST
The last two I plan to transfer into my SIPP because the other two are pretty good. Also Barclays was one of the companies where the bullying was at its worst (and I want to give them a final middle finger). Also far be it for me to prescriptive to the savvy readers on here, but I was speaking to a colleague at work and I was imparting my wisdom about pensions. And out of exasperation I said “if you have can’t be bothered to consolidate your pensions at least make sure you have your next of kin is filled in so you can pass your money”. So everyone make sure you have someone nominated. (Incidentally, I checked my LGPS pension and they STILL hadn’t registered my next of kin even though they sent me a letter to say they have)
My plan is to take 3% from
LGPS
NHS
SIPP
Income portfolio
A word about my income portfolio. There are more passive equity income funds coming on the market for generating income (Vanguard most notably). I plan use the income in this portfolio to buy different passive funds until I am ready to retire and use the income to help pay for little expenses. Also my savings will start throwing off £300 in 2021 (if current interest rates are held at their current level) and I can use that to rebalance my income portfolio.
However, I am reminded of the quote by the German Field Marshal Moltke and I paraphrase “The mechanics and consequences of every major financial strategy are so far-reaching they usually bring about a complete completely altered situation a new basis for the adoption of new measures. One cannot be at all sure that any financial plan will survive its first encounter with a hurdle or obstruction. One the naive supposes the progression of a plan represents the strict application of a prior concept that has been worked out in every detail and followed through the very end”
So I will continue to check my pensions and look at the annual budget if there are any more cash efficient ways to increase my wealth. But be flexible enough to change when necessary.