Happy Thoughts

Jonathan Clements

THINK ABOUT THE BAD stuff that didn’t happen. Very few of us will have a year when we crash the car, our home burns down, our employer goes belly up and our big bet on a single stock goes way down. Yet all of these things could happen, which is why we buy auto and homeowner’s insurance, keep an emergency reserve and avoid big bets on a single stock.

Sound sensible? There are two great dangers. First, we might be lulled into complacency by good times. Not many of us would drop our homeowner’s insurance because we haven’t ever had a fire. But a string of good years in the stock market can cause folks not only to question the value of bonds, but also to toss out fuddy-duddy notions of diversification and instead bet their life’s savings on an increasingly narrow selection of stocks.

Second, we might fail to address some risks, either out of ignorance or denial. For instance, many folks head into retirement without realizing there’s a decent chance they’ll live into their 90s, and also without a plan for how they’d cope with nursing-home costs.

How can we get a better handle on the risks we face? Try wrestling with these four questions:

  • How would our families cope financially if our paycheck disappeared? That might happen because of a layoff, ill-health, disability or premature death. To fend off these various threats, we should have an emergency fund and health insurance, and perhaps also disability and life insurance.
  • How would we cope financially if our major possessions were damaged or destroyed—or we were held responsible for harm done to others? This is a reason to buy auto, homeowner’s and umbrella-liability insurance.
  • What would it mean for our portfolio if some part of the global financial markets had devastatingly bad performance? I’m not talking about a temporary dip in prices. Instead, at issue is a permanent loss of value—or a bear market that drags on for so long that it might as well be permanent. Think about the 86% loss suffered by shareholders of Valeant Pharmaceuticals over the past eight months—or the 55% loss suffered by Japanese stocks over the past 26-plus years. Is your portfolio sufficiently diversified to withstand losses like that?
  • How would we cope financially if we lived extraordinarily long lives? Among affluent 65-year-olds, the median life expectancy for women is age 90 and for men it’s age 88—which means half of these folks will live to these ages or beyond. What to do? Delaying Social Security to age 70, so you get a larger monthly check, is a great place to start.

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