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Holistic Financial Wellness Principles: Principle #5 – Hope for the Best, Prepare for the Worst

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My minder, social media coach, cheerleader, and overall brave new world guru, Julia Page must take some responsibility for this essay about Holistic Financial Wellness Principle #5.

It’s not that she told me what to write. One of the reasons I hired her is because she is so good at letting me be me. I love to write but breaking my thoughts into bite size memes doesn’t come easily to me, and while Julia tolerates my long windedness, she told me that I needed to discard my original draft and write a crisper, more focused version of this essay so that it would be both easy to read and helpful to readers who struggle with money issues.

I understand that these days, people have very little time to devote to reading – maybe checking out a link during a break, listening to an idea passed on by a friend, or maybe, if you’re lucky, finding an insight from the avalanche of information in your daily feed that will help you solve a problem that is keeping you from making progress.

This seems to be the state of the world and a consequence of an acceleration and a compression of the time we are given to solve the problems we face. That is neither good nor bad, and I don’t spend much of my time trying to figure out who or what is to blame – it is just a feature of the world we live in.

And so, in this essay, while just as long as the others in this series is focused on the essential task of trying to help you understand the essence of HFW#5 and why it can help you survive and thrive financially.

Holistic Financial Wellness Principle #5 is perhaps the most difficult and counterintuitive of the principles I espouse. In addition to using the word “antifragile” – a word that doesn’t appear in any dictionary you are likely to have in your house, it relies to a great degree on the work of Nassim Taleb, a man who is not easy to understand – particularly the mathematics that forms the rock-solid basis for his conclusions. But just because Dr.Taleb is hard to understand doesn’t mean it is hard to understand what will help you survive and even thrive in a world of Black Swans and fat-tailed distributions. You won’t learn it all here, but at least you’ll get a taste of what Chapter 8 will tell you if/when you end up reading Money Mountaineering.

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Fragility, Hidden Risks, and How the World Changes

“I know that history is going to be dominated by an improbable event, I just don’t know what that event will be.” ― Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

What Dr. Taleb says above has been shown to be the case again and again in the last several thousand years, but it took reading his three books (Fooled by Randomness, The Black Swan, and Antifragile) for me to really get it and start incorporating his insights into how I structured my financial life.

Fooled by Randomness taught me that most of the Probability and Statistics I learned in college and as an actuary, was, at best, incomplete, and, often, downright misleading. The Black Swan was sobering, but not as disorienting to me since as an actuary I was used to helping my clients protect themselves against things that almost never happen, but reading it helped me appreciate that the low probability/high impact events that do happen are the things that, in fact, change the course of history. This was hammered home by both the Financial Crisis of 2008 and the Pandemic of 2020 – which I think most of us would agree were exactly the kind of Black Swan events that Dr. Taleb talks about.

In 2012 Nassim Taleb published his third book Antifragile. By then I was enough of a fan to buy it as soon as it came out and devoured it immediately, learning that “fat tailed distributions” weren’t just the place where Black Swans come from, but are also the breeding ground for events that can make you stronger when the world changes in dramatic and unexpected ways.

Understanding Nassim Taleb and Using his Insights

Holistic Financial Wellness Principle # 5 says:

“Organizing your financial life to survive a severe economic or life event is essential for long-term financial health. Strive to be antifragile.”

What that means is first and foremost, that you should prepare to survive a potential Black Swan event, and second that you should try and structure your assets and liabilities in such a way that you benefit rather than suffer from the volatility that long term exposure to markets governed by fat tailed distributions will inevitably produce.

When the Financial Crisis of 2008 occurred, I was living and working in Paris, France and had the benefit of being able to watch the financial world crack and crumble from a safe distance. For the first time in my life, I realized that almost everyone who was responsible for “managing” our economy and keeping the global financial system operating didn’t know what was happening and, worse,  didn’t know how to stop the wildfire that was destroying corporations,  banks and even a giant insurance company (AIG) along with the financial lives of millions of people who were losing their homes, their jobs and even their pensions and retirement savings.

It is easy to forget how scary and uncertain those times were, and though our economy and the markets have recovered, the experience told me that not only can it happen again, but eventually it will happen again – not a “real estate bubble induced financial meltdown” but something else just as unexpected and just as world changing. When the Pandemic of 2020 came ashore and crashed our economy so severely that the country’s unemployment rate increased from under 4% to 14.7% in one month (something that had never happened before) I was ready, or, if not ready, at least prepared enough to not have to worry about by income or my ultimate financial survival.

Now that the economic crisis associated with COVID has passed, or at least morphed into something else, we are beginning to forget again how scared we all were about our money and our jobs and feel that things are getting back to normal – economically at least. Maybe so, but I still think the lessons of these two Black swan events should be incorporated into how we manage our financial lives and I believe that keeping Holistic Financial Wellness Principle #5 in mind can help.

So, what did I do to prepare, and why am I feeling ok financially?

It is because I took a “barbell” approach to my financial life to become antifragile and, through redundancy and insurance, made sure that if one part of my personal balance sheet disappeared, I would still have enough resources to sustain myself and rebuild anything that was lost.

I will tell you, in a minute, a little bit about what I did, but first I want to go slightly deeper into the insights that informed that strategy. From Dr. Taleb’s books I learned that

  1. Pronouncements by investment experts about the future behavior of many investment markets that are based on “historical patterns” including those based on capital market assumptions that come from  “sample means,  sample variances, and sample correlation coefficients” are almost certainly wrong because one of the statistical consequences of being in a fat tailed distribution is that you will never  be able to collect enough historical data to know just how likely or unlikely extreme returns (positive and negative) will be in a given market whether it be soy bean futures or cryptocurrency.
  2. The situation is not as hopeless as the above would suggest because it is possible to gain some insight into the nature and extent of the “fatness” of the tail of a given distribution, and, in particular, it is often possible to determine whether the likely nature of the distribution provides an opportunity for profiting from volatility

It is not at all obvious how to take advantage of item 2 from a theoretical perspective, but as a practical matter I believe that the concept of using a “barbell strategy” as I describe in Chapter 8 of Money Mountaineering is something to consider.

Beginning in early 2008 I started to model my financial strategy along these lines, first spreading my money among different banks eventually having significant percentages in 4 different major institutions. At the same time, I started to radically diversify my sources of retirement income, eventually obtaining Life Insurance and Annuities from 3 different major insurance companies as well as a Charitable Gift Annuity and a Charitable Remainder Trust from my old school which has an endowment of almost $500 million backstopping the life income that they will begin paying me when I turn 65. It goes without saying, that I also made sure that I had enough insurance to protect me against known contingencies like death, disability and other hazards that are more easily imagined (fire, theft, and being sued).

For the next few years, I didn’t worry too much about my long-term financial security. I had a secure and stable spot in the actuarial profession and was confident I would have enough income to meet my needs and then some until I had to stop working as a W-2 employee. That didn’t happen until 5 years ago, when in 2016, my company merged with another giant consulting/brokerage firm, and I decided to take early retirement.

As soon as I retired, I organized my financial life as two barbells. On the one hand I have a collection of diversified assets that will provide me with bullet-proof secure and steady income that will be enough for me to live on if I lose everything else. They include the annuities I described above, as well as cash value life insurance, the Pension benefits that I now receive from the companies I had worked for as an actuary and a an old 401(k) plan that is 100% invested in US TIPS (“Treasury Inflation Protected Securities”).

The above investments comprised a large percentage of my assets, so I don’t have a lot of extra cash to deploy to the other barbell, but what I did have, I deployed into highly speculative investments (mostly collectibles) whose payoff will likely follow “Pareto’s rule” –a form of fat tailed distribution where most of what you invest in earns nothing or less but every once in a while, you hit a “home run”. Since I didn’t have enough investable assets to construct a true second barbell (e.g., by becoming an “angel investor’ in multiple start-ups) I instead decided to invest my time in lots of different side ventures, most of which sill likely come to naught, but any one of which could substantially reward me if they are successful.  That is how I apply Holistic Financial Wellness Principle #5.

Get Ready for the Future

These days, Nassim Taleb continues to make his writing available to all who are curious to read about his ideas in real time. Specifically, if you go to academia.edu and follow him, you will be able to read many of his recent papers, both technical and not. Like many things in life, working through what Nassim Taleb has to offer the world is not easy, but for many of you it could represent a very smart investment of time and energy.

To provide one recent and particularly timely example, in June of this year, Dr. Taleb posted this paper about bitcoin:

https://www.academia.edu/49313911/Bitcoin_Currencies_and_Fragility

This one is not that difficult to read, but if you are not very “mathy” then the explanation of the paper posted by Michael Edesess on Advisor Perspectives in July explaining Dr. Taleb’s work should help. You can read it here:

https://www.advisorperspectives.com/articles/2021/07/18/why-nassim-taleb-says-bitcoin-is-worthless

In the last few years, many of my friends and colleagues have wondered why I speak about Nassim Taleb so frequently and with what is sometimes perceived as “missionary zeal”. I hope this essay has provided at least a partial answer.

The truth is that, if and when a true Apocalypse comes, none of what I or Dr. Taleb says will matter much, but until that day arrives, Dr. Taleb’s insights are well worth absorbing– particularly his understanding of the Fat Tailed Distributions in which we find ourselves embedded in. For me, the message is clear, and to paraphrase what I posted a while ago about risk management in a world governed by fat-tailed distributions:

“If you live your life believing that Life follows a Normal distribution, you will find that things almost never turn out as badly as you fear, except when they turn out much, much worse.”

But things can also turn out much, much better than you expect and that is where antifragility comes in.

Perhaps the best way I can explain my approach is to quote the advice my father used to give me throughout my childhood– “Hope for the best but prepare for the worst”. That and his advice to me shortly after I graduated college to “keep as many irons in the fire as you can” are two of the teachings that have allowed me to survive and thrive, in the world of money for over 40 years.

That, essentially is what Holistic Financial Wellness Principle #5 is all about.

Holistic Financial Wellness Principles: Principle #4 – Fear is the Enemy of Curiosity

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As I started to write about the 4th fundamental principle of Holistic Financial Wellness, I realized that while many of the 6 HFW principles I espouse are more and less applicable in our lives at different times, the need to be able to live comfortably with uncertainty as you make financial decisions that have  significant consequences for your future while also entailing painful costs in the present may be, for many, many people, the most important principle of all right now.

I considered lots of stories and lots of different aspects of making decisions under uncertainty to illustrate what I wrote in Section III of Money Mountaineering, but in the end I decided to address the “elephant in the room” and talk about the two parts of our human nature that can hijack our judgment and ability to make good financial decisions when the stakes are significant and the outcomes are multiple and highly uncertain.

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Hustling Chess, Overcoming Fear and Getting Curious

A few weeks ago, I went to New York City where I visited one of my favorite spots – the park at the south end of Union Square where the chess hustlers make their living charging nominal fees for lessons to those who appreciate their skills and winning money over the board from those who don’t. When I lived in Westchester and worked in NYC in the 1990’s I spent many hours getting to know these unusual characters and was able to learn a few traps and tactics that let me scare a few masters in the weekend tournaments I used to play in during my time in the City.

One of my favorite denizens of that world is a man named “Po” — a wise, funny and fast talking player of near International Master strength who never lets his customers know quite how strong he is. Po has beaten almost all of the current generation of young grandmasters, catching them as prodigies on the way up (e.g. Hikura Nakamura, Irina Krush and many others). To hear him tell it, his “lessons” helped a few future stars learn some practical tricks that fueled their rise to the top.

Like many great chess players, Po has a distinct world view and a well-articulated philosophy on how to survive on the chess board and in life. When I asked him what he thought of the current state of the world and what he suggested people do amidst all the confusion and chaos that seems to surround us, he paused and then gave me some wisdom that he passes on to both his friends and his customers. He said that the important thing was to not be afraid – not of your opponent or the all the unseen threats that might lurk on the board. He thought that most people are suffering now because “they opened their eyes and found that it is still too dark to see”.

For me, not only is that great advice, but it highlights perhaps the greatest challenge we face in living with “not knowing” and making good financial decisions despite all the uncertainty of the future and the incomplete information we have about the present.

Decisions over the chessboard are often not that different than the financial decisions I speak about in Money Mountaineering. Both entail making choices whose long term (and even short term) consequences are often impossible to predict and not even a grandmaster will be able to understand all of the aspects of a given position, let alone the plans and strategies hidden within the mind of the opponent sitting across the board. Curiosity and an ability to be openminded enough to consider many possible futures at one time is critical to becoming a good player.

For financial decisions this is even more important. Fear is the enemy of curiosity, and curiosity is what will allow you to identify the important things you can figure out and those that you can only make educated guesses about. It will help you identify the areas where a financial expert can explain aspects of your decision that you need to understand and will allow you to absorb the information that the expert provides. Overcoming fear and becoming curious will help you identify the aspects of your decision that can never be determined and allow you to make better choices.

As I learned from working with Annie Duke, whose expertise is poker not chess, the key is to make smart bets and then recognize that no bet on the future is a sure thing.

So, take it from Po. Even though you might be scared of the dark and can’t see what is down the road, that doesn’t mean you shouldn’t proceed forward, gathering the clues, getting help where you can and making the best financial decision you can with the information you have and the range of possible outcomes that the future presents.

Unfortunately, overcoming fear is not enough, and to truly be comfortable with “not knowing” you also need to overcome at least one other bit of psychological baggage that most of us carry, and for that I want to talk about what I learned from a different teacher.

Marilee Adams and the “Learner Mindset”

Marilee Adams is a writer friend who I got to know several years ago at a 3-day authors retreat sponsored by Berrett Kohler, the company that published my first book and several of Marilee’s. Marilee’s books have been hugely popular and despite our different statuses in the world of books and book sales, Marilee took an interest in my ideas and gave me a great deal of advice and support all throughout my process of writing Money Mountaineering.

In addition to having had the same publisher for our books, it seems that my suggested approach to the unknowability of the future is quite similar to aspects of Marilee’s advice on how to address uncertainty in general and how to gather enough information to make good decisions. As with many of my fellow authors, I had scanned Marilee’s book, but until this Spring I had never had the time to read it cover to cover.

That changed earlier this year when Marilee invited me to be a guest at one of her 4 week/8 session workshops on how to “Change Your Questions and Change your Life”. I didn’t have to think twice before accepting her generous offer because, in addition to the prospect of getting to watch how Marilee works her magic on large groups who flock to her usually sold-out workshops, I also sensed that her message to adopt a “Learner Mindset” when facing important life decisions might be very relevant to what is embodied in my 4th foundational principle of Holistic Financial Wellness. These two factors made it a very easy decision to devote the minimum 12-hour time investment to attending the workshop.

It turns out that adopting the Learner Mindset is not exactly the same as what I mean when I write about becoming comfortable with the uncertain future, but had I not gone to the workshop I would never have realized quite how important it is not to fall prey to anticipation, a state of mind that can lead you to make bad decisions – particularly financial ones.

Just like fear is the enemy of curiosity, I think anticipation is the enemy of open-mindedness. If you think you know what is going to happen (good or bad), then you can’t be open to the range of possible ways in which the future might unfold. And that is exactly what anticipation is — expecting something specific to happen while closing your mind to all the other possible paths the future might take.

This was not news to me, but during the workshop, Marilee went pretty deeply into what generates anticipation in us and what we should do to not let it bite us. And even though I have thought about uncertainty and how to deal with it for decades, I learned something important from Marilee and am grateful to her for reframing the problem of our tendency to think we know what will happen instead of what might happen in this way. She helped me understand in a deeper way one of the key things that cause us to sometimes lose our ability to think clearly and make good decisions in the face of an uncertain future.

That being said, my philosophy on the subject of uncertainty is, I believe, somewhat different than Marilee’s and in particular, I think we differ in our analysis of what allows us to overcome the fear and other obstacles that keep us from living comfortably in an uncertain world.

This is in no way a criticism of the value of what Marilee provides or the way she does it. For many people, Marilee’s approach to developing a “Learner Mind” is highly effective. The issue for me, however, is that in Marilee’s workshops (or at least the one I attended), there is a lot of homework, and I was asked to work harder than I was prepared to when I accepted her invitation.  For many, I realize that that, by itself, is a good thing, but in this case my personal idiosyncrasies prevented me from getting the full benefit of Marilee’s training.

My problem is that fundamentally I don’t like homework – I got away with not doing much in school and in many cases didn’t see the point of why it was assigned in the first place. My father and I had arguments about that, and like many things, he was more right than wrong in lecturing me for not doing my homework, but still, somehow, I came out ok.

Many believe that our minds can be trained to be curious, and maybe they can, but I think our ability to ask good questions can also come from a different source – specifically the wealth of natural curiosity that abounds within us, and just needs to be unlocked and allowed to emerge naturally.

For me, curiosity and disciplined practice/training just don’t mix, though just like Holistic Financial Wellness Principle #1 states, we are all unique individuals and different approaches to getting better at making good financial choices are appropriate for different people. Many of us welcome the discipline and skill development that Marilee imparts – and she is an extraordinarily good trainer in that regard, but I take a somewhat different approach to my own path to getting comfortable with “not knowing”.

Specifically, I believe that humans are at their best when they get in touch with that wild, playful, undisciplined adventurous side – a side that, if we were lucky, we enjoyed as a child and can still return to. For me at least, that’s where my curiosity lives.

So how do you get more curious and want to ask the questions you need to ask – about your job, your 401(k), your bank, or even cryptocurrency? I don’t believe there is a single answer to that question, but my approach is different than Marilee’s. Rather try to train myself to be curious, I simply listen to my own inner voice and pay attention to what I hear. Am I falling prey to anticipation when I think I know what is going to happen? Is it fear which keeps me from thinking about what might happen? Or is it a combination of both – throwing me off track as I hear myself say “I am afraid and don’t want to think about what I am sure will happen (in the market, the economy, my company, and even my family).”

It is also important to realize that being curious won’t necessarily help you to figure out what will happen next. Fundamentally, to make good financial decisions in an uncertain world, we need to remember that while the future is unpredictable it is not unimaginable. Being curious and open-minded is just the first necessary step towards financial wellness.

In the end, I believe that Marilee and I agree completely that to make better financial choices you need to be curious enough to ask the right questions and open-minded enough to listen to the answers.

That is what the Holistic Financial Wellness Principle #4 is all about.