Saturday, January 14, 2012

Be Prepared...but not Too Prepared

Since entering the finance industry, I have heard just about every possible warning sign of what lies ahead for Americans and how to prepare for it.  Selling “fear” is a multi-billion dollar industry: insurance brokers, doctors, politicians, religious zealots, financial advisors, are among the people who have direct or indirect compensation related to scaring you into taking some kind of action.  

Think about it:

“You will lose your job and your house if you don’t throw that other guy out of office by voting for me.”
– handsome white-toothed smiling politician

 “You must have life insurance and disability insurance and property and casualty insurance and flood insurance and renters insurance and hurricane insurance and earthquake insurance and auto insurance and travel insurance and…”
-nebishy insurance broker

“If you don’t pray 15 times a day and give all your money to the (insert religion) you are going to hell.”
-some guy on the subway

I think you get the point.  In the context of the financial crisis, which is going on its 4th year, I have found myself suggesting ways for people to prepare for an “event” that may or may not happen one day.  Generally I tell people they should own some physical gold or silver (somewhere between 1 and 20% of their investable assets depending on their level of bearishness) and go out and buy a gun.  Both seem reasonable enough as they will not break your bank.  They are just my versions of “insurance policies” which I hope to never use, but exercise our rights as Americans to bear arms and invest in real currency.    

If you listen to the interwebs you will hear suggestions of how to prepare, above and beyond the reach of the average American:  farmland (I suggested this too but now I look at prices and it is way less affordable today), pvc and vacuum sealed organic seeds (I own these and it makes me laugh), 100 gallon drums of water, solar panels, bullet warehouses, foreign passports and bank accounts, bomb shelters, fuel storage, 6 months non-perishable food, off-site hard drive storage, escape routes, blah blah blah.  I realize now that it is impossible to live a happy life while simultaneously consuming yourself by preparing for every possible outcome.  The truth is no one really knows how and when this will all shake out if it ever does.  The powers that be are called that for a reason and they control this mess…for now.

We would go broke and spend all of our waking time preparing for every possible future event given the millions of possible outcomes.  So rather than prepare for them all, we should just prepare for a few of them by taking actions that are reasonably priced and take a reasonable amount of time.  Everything else falls under the get educated category -  heed the fact that there is some probability that anything can happen. 

My business partner says that when he thinks about all the things he needs to do to protect his family, he gets on and starts clicking away at dry food and supplies and suddenly his cart is full of hundreds of items.  Then he realizes he could never be fully prepared and he needs to get back to what would really help them today…like earning a living to put food on the table and buying some diapers.   

This may sound like a 180 from my previous notions but it isn’t.  There is absolutely risk out there but being surrounded by quants all day I realize there is a difference between perceived probability and actual probability.  If we cannot even predict every fathomable outcome how could we possibly be expected to prepare for them?  I am finding that I would rather live happily than live in fear.  

I guess you could sum it up by saying “stay educated but keep on keepin’ on.” If some terrorist wants to blow up my local diner I don’t know that I can hedge this risk out of my life completely, so I am not going to let the thought of it ruin my day.