Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
The Price of "Prudence"
Old 06-22-2009, 01:25 PM   #1
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,036
The Price of "Prudence"

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?
__________________

__________________
FIREd is online now   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 06-22-2009, 01:38 PM   #2
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
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.
__________________

__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 06-22-2009, 01:45 PM   #3
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,036
Quote:
Originally Posted by ziggy29 View Post
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.
__________________
FIREd is online now   Reply With Quote
Old 06-22-2009, 01:48 PM   #4
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,846
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.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is online now   Reply With Quote
Old 06-22-2009, 01:49 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
bbbamI's Avatar
 
Join Date: Dec 2006
Location: Dallas 'burb
Posts: 9,039
Quote:
Originally Posted by FIREdreamer View Post
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.
__________________
There's no need to complicate, our time is short..
bbbamI is offline   Reply With Quote
Old 06-22-2009, 01:50 PM   #6
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by FIREdreamer View Post
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.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 06-22-2009, 02:01 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
calmloki's Avatar
 
Join Date: Jan 2007
Location: Independence
Posts: 5,459
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.
__________________
calmloki is offline   Reply With Quote
Old 06-22-2009, 02:12 PM   #8
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,036
Quote:
Originally Posted by ziggy29 View Post
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?
__________________
FIREd is online now   Reply With Quote
Old 06-22-2009, 02:23 PM   #9
Thinks s/he gets paid by the post
Leonidas's Avatar
 
Join Date: May 2006
Location: Where the stars at night are big and bright
Posts: 2,847
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.
__________________
There is no pleasure in having nothing to do; the fun is having lots to do and not doing it. - Andrew Jackson
Leonidas is offline   Reply With Quote
Old 06-22-2009, 02:28 PM   #10
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,036
To be clear, I agree with W2R's mom and Calmloki: IMO, prudence is to be moderate in all things.
__________________
FIREd is online now   Reply With Quote
Old 06-22-2009, 09:45 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Feb 2007
Posts: 1,015
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....?
__________________
Achiever51 is offline   Reply With Quote
Old 06-22-2009, 10:26 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,457
Wow - what an amazing story!!!!

Audrey
__________________
audreyh1 is offline   Reply With Quote
Old 06-22-2009, 11:12 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
bbbamI's Avatar
 
Join Date: Dec 2006
Location: Dallas 'burb
Posts: 9,039
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...
__________________
There's no need to complicate, our time is short..
bbbamI is offline   Reply With Quote
Old 06-23-2009, 01:53 AM   #14
Full time employment: Posting here.
Urchina's Avatar
 
Join Date: Feb 2008
Location: Central Coast, California
Posts: 891
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...
__________________
"You'd be surprised at how much it costs to look this cheap." -- Dolly Parton
Urchina is offline   Reply With Quote
Old 06-23-2009, 03:21 AM   #15
Thinks s/he gets paid by the post
Tadpole's Avatar
 
Join Date: Jul 2004
Posts: 1,169
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.
__________________
Tadpole is offline   Reply With Quote
Old 06-23-2009, 08:13 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
freebird5825's Avatar
 
Join Date: Feb 2008
Location: East Nowhere, 43N Latitude, NY
Posts: 9,017
My take on gloom and doomers: The sun came up today in the east, so we're good to go.
__________________
"All our dreams can come true, if we have the courage to pursue them." - Walt Disney
freebird5825 is offline   Reply With Quote
Old 06-23-2009, 08:25 AM   #17
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by Urchina View Post
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.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 06-23-2009, 10:00 AM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Even the tinfoil folks are right 1 out of 6 times or so..........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 06-23-2009, 10:18 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
dex's Avatar
 
Join Date: Oct 2003
Posts: 5,105
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.
__________________
Sometimes death is not as tragic as not knowing how to live. This man knew how to live--and how to make others glad they were living. - Jack Benny at Nat King Cole's funeral
dex is offline   Reply With Quote
Old 06-23-2009, 10:40 AM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
HFWR's Avatar
 
Join Date: May 2005
Location: Lawn chair in Texas
Posts: 12,964
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".
__________________

__________________
Have Funds, Will Retire

...not doing anything of true substance...
HFWR is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
tiny button fix: "Save" edited comment sometimes = "Vote Now" ladelfina Forum Admin 0 09-24-2008 02:22 AM
"Gut feel" versus "evidence-based" medicine Buckeye Health and Early Retirement 10 11-08-2007 11:21 AM
Book reports: "Blink" & "Tipping Point" Nords Other topics 2 12-04-2005 05:15 PM
The "price" of diversification preben FIRE and Money 28 07-18-2005 05:11 AM
BW: *"Retirement: *What Price Risk?" Nords FIRE and Money 24 04-28-2005 08:29 AM

 

 
All times are GMT -6. The time now is 05:50 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.