Defending Yourself

Adam M. Grossman

I JUST CAME ACROSS a magazine article from the B.C. era—before coronavirus. The article, which appeared in a popular personal finance magazine, described a certain type of bond investment. The writeup was well researched and balanced, including a discussion of various risks.

In fact, the author raised the possibility of an economic downturn. How did he assess that prospect? “Recession, as always, is a risk,” he wrote, “but where’s the recession? Not seeing it, friends.”

That was in February. I can’t blame the author for so easily dismissing the risk of recession. Anyone would have done the same thing. After all, unemployment was at a 50-year low as recently as two months ago. But since then, everything has changed. In the past five weeks, 26 million Americans have filed for unemployment benefits.

While no one could have seen this coming, it raises an important question: If our financial circumstances can change so dramatically, so quickly and so unpredictably, how can any of us make plans for the future? To put it more bluntly, what’s the point of planning if an extreme event like today’s pandemic can upend things at any time?

Unnerving as this period has been, and as unpredictable as the future is, here are three areas where I think planning can be worthwhile:

1. Contingency planning. Suppose you walked into the Pentagon. I imagine sitting on some shelf is a contingency plan for every conceivable type of military threat. Yet no one, not even with the resources of the Pentagon, can conceive of every possible risk. Every time things go awry, it’s a little different.

Nevertheless, it’s still worth planning. Yes, each risk is different, but they all fit into a set of categories that you can conceive of. Coming back to personal finance, these categories include:

Are there other risks? Certainly. Still, most financial problems fit into one of the above four categories, and that’s good news. I can’t think of any financial commentator—myself included—who predicted our current mess. But you didn’t need to. Instead, the heart of financial planning is simply to think through each of the four risk categories and to have a contingency plan for each.

Does this mean that you’ll be able to weather every possible storm? No, it would be naive to assume that. Indeed, no amount of planning would have made today’s situation easy. Still, I see value in thinking about contingency plans—so you know, in advance, which levers you could pull in case of emergency.

2. Diversification. If you look back over the past 10 years, one of the most successful investments would have been the Nasdaq 100 Index of growth stocks—Amazon, Apple, Alphabet and their peers. But if you had owned that index over the prior 10 years—from 2000 to 2010—you would have lost money, and a lot of it. Similarly, if you had kept your money in bonds in recent years, you would have lagged behind stocks. But this year, it’s the opposite. Most bonds are doing great.

This is the unfortunate reality of diversification. There’s no way to be above average all the time. But as you think about ways to protect yourself from the unknown, diversification may be your most powerful defense. And remember that spreading your investment bets is just one form of diversification. There are many others. When things begin to return to normal—hopefully soon—I think it’s worth spending time brainstorming about other ways to diversify your financial life.

3. Insurance. Physician-blogger Jim Dahle has a book called Financial Boot Camp in which he addresses the most important topics in personal finance—everything from budgeting to student loans to investments. But where does he start? The very first chapter is about disability insurance. And chapter 2? Life insurance.

In Dahle’s view—and I agree with him entirely—these are the most important things. If your assets aren’t yet at the level where you can self-insure, this should be the first thing you look into on Monday morning. You can’t foresee every type of crisis. But it doesn’t take much to figure out how much disability and life insurance would be sufficient in a worst-case scenario.

Adam M. Grossman’s previous articles include As IfLook Around and Under Pressure. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.

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