The Price of "Prudence"

[FIREd]

I have peeked into the dark side lately and read a few doom and gloom books, blogs and forums. There were many suggestions on how to protect your wealth (and life) from a wide range of supposedly imminent disasters. Suggestions spanned from keeping all your money in gold, to building a survival compound in a remote area, to getting a second citizenship (I'll spare you the more crazy suggestions)...

I couldn't help but think that a lot of the ways that are supposed to protect your wealth could actually be great barriers to building wealth in the first place.

In one of the books I read, the author tries to protect a trivial amount of wealth by literally spending hundreds of thousands of dollars (and getting in further debt in the process) to acquire a second citizenship, guns, Swiss bank accounts, survival gear and what not. He clearly thought that being prepared for whatever disaster was the "prudent" thing to do and that the money was well spent. But what if the world doesn't end? His extreme "prudence" might have costs him a shot at financial independence or worse...

Of course he was extreme in his views. But what about the people who fled the stock market last October and parked their money in treasuries, they too might have paid a price for being seemingly "prudent". What about people who bet the farm on gold and silver in the early 80's?

Could it be that, by trying to be as safe as we can be, we are in fact taking unintended risks with unimaginable consequences? Could it be that, by trying to insure against every conceivable risk, we end up making irreparable damages to our financial future?

 

[ziggy29]

Maybe, but there are a lot of ways to look at it.

Many people don't invest to maximize expected wealth. Many people invest to grow their portfolios as much as they think they'll need without taking more risk which also increases their risk of falling short. That's the whole idea behind finding an appropriate asset allocation.

Someone who is 50 and has $1.8 million and expects to need $2 million in current dollars by age 60 doesn't need to be aggressive. In fact, being aggressive will likely make him more wealthy in the end but also -- somewhart paradoxically -- increases his chances of failing to meet his goal.

I see accepting reduced returns in exchange for reduced chances of a totally busted retirement as just another form of insurance -- money you "pay out" (in the form of accepting lower returns) in exchange for reducing the chances of a hardship that blows up your retirement.

Note here that I'm talking about hedging bets with moderate asset allocations, not going "all in" to doomsday and overly defensive investments. There's nothing wrong with someone wanting to hold 5-10% in gold and gold mining stocks as a hedge against inflation and a declining dollar; there is something wrong with wanting to trade in your 401K, eat the taxes and penalties, and buy a bunch of gold coins to store under your mattress.

 

[FIREd]

Maybe, but there are a lot of ways to look at it.

Many people don't invest to maximize expected wealth. Many people invest to grow their portfolios as much as they think they'll need without taking more risk which also increases their risk of falling short. That's the whole idea behind finding an appropriate asset allocation.

Someone who is 50 and has $1.8 million and expects to need $2 million in current dollars by age 60 doesn't need to be aggressive. In fact, being aggressive will likely make him more wealthy in the end but also -- somewhart paradoxically -- increases his chances of failing to meet his goal.

I see accepting reduced returns in exchange for reduced chances of a totally busted retirement as just another form of insurance -- money you "pay out" (in the form of accepting lower returns) in exchange for reducing the chances of a hardship that blows up your retirement.

Note here that I'm talking about hedging bets with moderate asset allocations, not going "all in" to doomsday and overly defensive investments. There's nothing wrong with someone wanting to hold 5-10% in gold and gold mining stocks as a hedge against inflation and a declining dollar; there is something wrong with wanting to trade in your 401K, eat the taxes and penalties, and buy a bunch of gold coins to store under your mattress.

I was not talking about calibrating your risk using an "appropriate" AA (whatever it means). I was thinking doom and gloom here (and so many people seem to be in that mindset righ now). I was talking about going to extremes because of fear.

 

[W2R]

I think that to some, doomsday preparation becomes nearly an obsession. It's sort of like middle aged women saying the office is too cold. The office just can't be warm enough for them, and if it is, it still isn't the right temperature. Likewise, to some you just can't be well enough prepared for whatever doomsday they are envisioning.

My mother always used to caution "Moderation in all things" (which is really an extrapolation from Aristotle). Sure, it's good to be prepared but there is such a thing as going too far.

 

[bbbamI]

I was not talking about calibrating your risk using an "appropriate" AA (whatever it means). I was thinking doom and gloom here (and so many people seem to be in that mindset righ now). I was talking about going to extremes because of fear.

Fear puts us in survival mode. People smell that fear and write books to give the readers validation. The only one that makes money is the author and publishing company...everyone else loses. It's a vicious cycle.

 

[ziggy29]

I was not talking about calibrating your risk using an "appropriate" AA (whatever it means). I was thinking doom and gloom here (and so many people seem to be in that mindset righ now). I was talking about going to extremes because of fear.

But what's an extreme? Going 10% into gold? 20%? 50%?

Selling all your stocks? Selling half of them? Deciding to ratchet down your AA a bit because you realize you overstated your risk tolerance (guilty as charged)?

Other than a few occasional [-]gloaters[/-] prescient market timers, I don't see many people here saying that they are cashed out or cashed out in 2007. Most people are mostly staying the course, albeit possibly with either a lower or higher AA in stocks, depending on their temperament.

If people want to talk more gloom and bring on a "Death of Equities" moment, bring it on. I think we're starting to see that with more and more "Buy and Hold is Dead" articles and opinions.

Setting a little aside to survive worst case is one thing; assuming it will happen and (probably) shooting yourself in the foot is another.

 

[calmloki]

Balance in all things - it doesn't bother me to have food supplies that can be eaten, bleach for laundry or water purification, firearms that i enjoy shooting - if the doomsday stuff has other application or doesn't cost too much, then it's money well spent - spending massive amounts when you aren't trying to protect huge amounts is just silly. If the world goes to hell and the wild i-rabians or the yellow hordes or the dreaded hosers of the northland swoop in, face it, we're screwed. See the National Defense Training Film Wolverines w/ Patrick Swayze for approved conduct in that eventuality.

 

[FIREd]

But what's an extreme? Going 10% into gold? 20%? 50%?

Selling all your stocks? Selling half of them? Deciding to ratchet down your AA a bit because you realize you overstated your risk tolerance (guilty as charged)?

Other than a few occasional [-]gloaters[/-] prescient market timers, I don't see many people here saying that they are cashed out or cashed out in 2007. Most people are mostly staying the course, albeit possibly with either a lower or higher AA in stocks, depending on their temperament.

If people want to talk more gloom and bring on a "Death of Equities" moment, bring it on. I think we're starting to see that with more and more "Buy and Hold is Dead" articles and opinions.

Setting a little aside to survive worst case is one thing; assuming it will happen and (probably) shooting yourself in the foot is another.

That's why I put the word "appropriate" in quotes. It is hard to tell what appropriate is for each one of us. But again, you are looking at it from a rational point of view (as are most people on this board). But when fear takes hold of you, rationality of the first thing out of the door. For many doomers, the question seems not to be if but simply when the disaster will strike. For example many doomers want to hold their wealth in gold. In their mind, there is no doubt that gold prices can only go up because they "know" that the world is doomed. What if the world is not doomed and gold prices don't go up or worse, what if they go back to 2002-2003 levels? They might feel very safe holding their wealth in gold but are they? Are they any safer than someone holding all his/her wealth in stocks?

 

[Leonidas]

My mindset is to be a survivor while avoiding survivalist extremes. There are reasonable things you can do to be flexible when things turn bad, but trying to prepare for everything that could happen is just as dumb as fixating on one scenario. In the long-term things always return to some semblance of normal; I just want to be able to hang on and come out the other side. I try to balance the need to survive probable disasters with being financially prudent.

I don't want to be holding the bag owning some expensive junk that I might need.

An example is some purchases I have made in the last year. I bought an AR-15 at election time last year because I knew the prices were about to go through the roof. My investment has gone up 30% last time I checked. But my sons like shooting and it's a fun rifle to take out to the range and provide some father-son male-bonding. If the wheels fall off society's wagon in a big way I also have a weapon that is ideal for serious home defense.

The other purchase was made because I got tired of rotating our supply of "hurricane food". Normal canned goods don't last too long and you have to keep up with expiration dates to avoid having inedible food when you need it most. We got the dirty side of Ike last year, 30 miles from the coast, and the local stores weren't prepared for it. We did fine with what we had and could have gone longer, but a more direct hit would have meant that the stores would not open for a much longer time and I don't like the idea of relying on FEMA. I bought a couple of days worth of civilian MRE-type meals in case of evacuation, and found some freeze dried food with free shipping that I bought as well. The MRE's will last about 3 years or so, and the freeze dried stuff lasts for a couple of decades or longer. I eliminated a lot of shopping hassle for years for a few hundred bucks. When the MRE's get close to expiration, we'll take them on a hunting trip and eat them there.

In investing my goal is to keep the emergency fund and my own "buckets of money" plan in shape to weather short term liquidity crunches and medium term downtrends (like we've been experiencing). I have faith in the American market's ability to turn around and recover - eventually. Surviving the bad time without selling the seed corn is my concern. If anything, when I look at being prepared for the future in my investments, it's more about spotting opportunities in the midst of disaster. That doesn't always work out, but I'm much more inclined to put a bet down in favor of a long-term success rather than long-term failure.

Maybe I'm just an optimist.

 

[FIREd]

To be clear, I agree with W2R's mom and Calmloki: IMO, prudence is to be moderate in all things.

 

[Achiever51]

This thread reminded me of the saga of one of my former co-w*rkers at the end of 1999. He was convinced that when the calendar changed to 2000 all hell was going to break out. So he prepared, starting several years in advance.

He bought an old home in a pretty remote area and rebuilt it himself, telling everyone that he was prepared to go "off the grid" when the "inevitable" came. Along with a whole house generator, he prepared a basement "bunker", stocked up on food, water, fuel, weapons and a large amount of ammunition, just in case. Every week or so, he'd regale the office with updates on his activities, including the fact that he was doing all this work himself as he didn't trust anyone to come into his home. (He wouldn't even tell anyone the exact address, saying he didn't want to have strangers breaking in when the civil unrest began.) He was sure he thought of everything.

Unfortunately, one thing he apparently didn't do was check out the instructions for the whole house generator.

On the morning of December 31, 1999, his preparations for the upcoming Armageddon were all but complete. All that remained was to do a full power-on test run of the generator. He turned it on...and promptly blew out the power for about 500 homes in the nearby vicinity, including his own. It was such a big deal that the local tv news had a crew covering it! Turned out the generator was installed incorrectly, by a "friend."

But having a bunch of angry neighbors on New Year's Eve was the least of his worries. The faulty generator wiring caused a fire in his attic, nearly destroying the house in the process...and his insurance claim was rejected once the insurance adjuster discovered that all the work was done without permits or inspections and didn't meet any of the local building codes.

What's that saying about the best laid plans....?

 

[audreyh1]

Wow - what an amazing story!!!!

Audrey

 

[bbbamI]

Holy smokes! All I thought you needed for Y2K was a shotgun and a barrel of pork 'n beans.... I still have some beans left...

 

[Urchina]

What a prescient thread! I, too, have been visting the tinfoil hat brigades lately, and those boards are lit up like Christmas trees. I'm looking for information on food storage (we live in earthquake/wildfire/mudslide/rolling blackout country, after all) but the other stuff is pretty prominent and difficult to ignore.

I think the answer is, just like with FIRE, to make a plan and then work the plan, and to remove from your attention things that are counterproductive. So if part of our plan is FIRE (and it still is), we need to balance that with other plans (preparation, current comfort, etc.)

At least, that's what I'm trying to do. Otherwise I may as well start stocking up on tinfoil...

 

[Tadpole]

I don't pay much attention to the optimism of the gloom and doomers because I have all of them beat. I am convinced that that dark cloud that follows me moving over my head when I am at rest will inevitably decide to descend on my savings as massive inflation. The government will decide it cannot honor inflation bonds or COLAs, termites will take down my house, and I will live forever. No the gloom and doomers can't beat me so much as my own imagination.

 

[freebird5825]

My take on gloom and doomers: The sun came up today in the east, so we're good to go.

 

[ziggy29]

What a prescient thread! I, too, have been visting the tinfoil hat brigades lately, and those boards are lit up like Christmas trees. I'm looking for information on food storage (we live in earthquake/wildfire/mudslide/rolling blackout country, after all) but the other stuff is pretty prominent and difficult to ignore.

I don't ridicule or pooh-pooh the "tinfoil hat brigade" much. Remember all the abuse they took two years ago? I'll bet their 401Ks look a lot healthier than mine. The considerate ones haven't come back around just to gloat.

 

[FinanceDude]

Even the tinfoil folks are right 1 out of 6 times or so..........

 

[dex]

Just yesterday I was speaking with a guy 81. He was traveling the country in an pick up with a camper attached - been doing it since he retired at 55. He put all his money in gold and was happy about it.
He told me his life story over the course of the conversation.
The point is he was happy and it worked for him.

 

[HFWR]

Must be interesting paying for gas and groceries with gold. The transaction costs must be killer...

Prudence is not the same as wearing a "tin-foil hat".

 

[Dog]

Just about finished reading the Creature From Jekyll Island. I'm not quite sure what to think anymore.

 

[Urchina]

I don't ridicule or pooh-pooh the "tinfoil hat brigade" much. Remember all the abuse they took two years ago? I'll bet their 401Ks look a lot healthier than mine. The considerate ones haven't come back around just to gloat.

I think there's a lot of good information out there on the survival / emergency preparedness lists and blogs, but where does one draw the line? That's really the OP's question, right? At what point does "preparation" become counterproductive in terms of long-term prosperity and goals? And how do you separate the wheat from the chaff in the blogosphere?

For example, one of the blogs I was reading last night had a link to an article of dubious journalistic quality which claimed that US Embassies abroad are being instructed to purchase at least a year's worth of local currency, and to have it done by the end of summer. The speculation of the article's author was that a US bank "holiday" was going to be declared for a while this fall, making regular banking transactions nearly impossible, and so folks should (presumably) have a lot of cash on hand at home just in case.

How likely is this to happen? I have no idea. How valid is the information in the report? Who knows? I think that's the big challenge -- how do you find a solid middle line to walk, between "I don't need to prepare at all" and "I've got a reinforced-concrete castle in Idaho with six years' of provisions and its own armory?" Given that the future is uncertain and opinions abound, how does one set a course of action?

And, just to be clear, "tinfoil hat brigades" is my sense of humor gone awry. It's my pet name for the hard-core survivalist folks, many of whom seem excited about the prospect of a societal breakdown, just so they can play the game for real. Most of the folks on the preparedness networks do not seem to be this obsessed, and strike me as intelligent people making prudent preparations for inevitable disruptions of services. I apologize if this term came across as derogatory; it's not intended to offend.

 

[HFWR]

I could build my Fortress of Solitude, and prepare for the absolute worst. But the cost would lock me into a lifestyle that would really pi$$ me off if Armageddon didn't come...

 

[Cut-Throat]

Could it be that, by trying to be as safe as we can be, we are in fact taking unintended risks with unimaginable consequences? Could it be that, by trying to insure against every conceivable risk, we end up making irreparable damages to our financial future?

What was the right move in 1932 ?

 

[ziggy29]

What was the right move in 1932 ?

Going all in, particularly in July '32.

But what was the right move after the head-fake correction in mid-1930? Selling it all and staying away for two years. If you got back in toward the end of the rally in early 1930, you got creamed.

Is this 1932? Mid-1930? Or (most likely, IMO) something in between?

Hindsight is wonderful, since it tells us what to do. Too bad it's over 75 years too late to be of use.

And even if we made the right move *now*, do we know when to change direction? I think a lot of us don't. Which is why we may tinker on the edges -- particularly now with more people building more protection against inflation and depression in their portfolios and some people lightening up their AA a bit -- but for the most part, core investment strategies haven't changed much.

Some of the people who went too defensive in the early 1930s may have missed the explosive recovery in late 1932 and 1933.