The End of America

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I WOKE up face-down in a hotel room in Times Square. My entire body throbbed with pain. I slowly opened one eye … then the other. After a period of confusion I realised I was still in the same clothes from the night before – minus my wallet.

The doorman of my hotel explained, matter of factly, that I’d been ‘roofied (drugged) and robbed’ the night before. And as I slowly, sorely shuffled around New York that day, I swore I’d never go on holidays again. Life was too risky, the world too dangerous a place.

That happened to me years ago (and I’ve had multiple holidays in Manhattan since).

The strange thing is that over the last couple of months I’ve met a lot of older Aussies who have similar feelings of stress – about their finances. The last financial crisis has left them gun-shy in the face of an impending market meltdown.

Warning: Financial Crash Coming

You can’t blame them. Just this Thursday I turned on the respected ABC Radio program ‘AM’ and heard Westpac Senior Economist James Shugg say this:

“Day by day now, more and more people are buying into this idea that 2012 is going to be an absolutely catastrophic year for the European economy: wealth destruction, civil unrest, rioting, high unemployment, governments falling, and market chaos.”

But it bears remembering that in every decade the market feels like it’s going to mug and rob us.

In the 50s it was the Korean War, and the US Government was in a state of shambles. (At the time a young Warren Buffett was beginning his investment career. His father-in-law advised him, “You need to understand you’re up against it son, and it’s not your fault. What we’re experiencing right now is the end of America.”).

In the 60s communism was threatening the free world, the Berlin wall was erected, the Vietnam War began, and the Cuban missile crisis nearly ended everything.

In the 70s the stock market crashed, there was the OPEC oil crisis, the economy was shot with stagflation, and there was consistent alarm over America’s huge, unsustainable trade deficit.

In the 80s the world was an uncertain place, as highlighted by the Iranian hostage crisis in the US and concerns the Japanese were taking over. Then came the Black Friday share market crash in 1987.

In the 90s we endured “the recession we had to have”. Businesses went bust and homeowners struggled with 17%+ interest rates. The pilots went on strike. We endured the Asian financial crisis and the Iraq War (part one).

In the 2000s we were hit with the tech wreck, a monumental housing bust in the US, September 11, the Iraq War (part two), the Bali bombings, the Boxing Day tsunami and, to cap it off, the Global Financial Crisis.

Risky Business

Which brings us to today, where we’re dealing with the Eurozone debt crisis, the unsustainable US deficit, and worrying levels of household debt. And it’s serious this time. It always is when you have your life savings on the line.

The way the world is right now, some people think their only choice is to cash in their investments, buy gold, and stockpile guns. But I’ve never met anyone who’s become rich this way (okay, so there’s Daryl Somers, but that’s a whole other story).

Life is inherently risky. No doubt about it. And try as we might, risk cannot be packaged away in a neat little box. There’s no product (or politician) that can fully eliminate it. Like my nightmare in New York, sometimes life is risky. Sometimes the world is a dangerous place.

The only way to minimise risk is to deal with it head on. So let’s do it.

Dealing with Short-Term Risk

Your biggest short-term risk is that you’ll be caught without cash. It usually happens to people with big debts or big expenses (usually both). Thankfully there are some simple solutions:

First, lower your stress levels and bring down your debts and your expenses. When you boil it all down, you’re putting yourself under pressure for ‘stuff’. Most of it doesn’t matter. It can be replaced.

Second, work towards having three months of living expenses tucked away in a high-interest online savings account (Barefooters call it ‘Mojo money’). People who have a fully funded emergency fund rarely have emergencies.

Third, make sure you have the appropriate insurances: income protection, total permanent disability, and life cover. These can all be packaged as part of your super and paid for through your employer’s contributions.

The older I get the more I realise that managing risk is about what you don’t do, rather than what you do. I’m a very conservative guy. I’ll never, ever trade a night’s sleep for the chance to make or spend an extra buck.

Dealing with Long-Term Risk

Once you’ve got the short-term risks covered, it’s time to focus on the long term ones. Here also there are three things you can do:

Firstly, demand honesty – from your advisors and yourself. Dumb people worry about not appearing smart, so they don’t ask a lot of questions. Smart people get good, honest advisors around them and ask plenty of dumb questions until they feel secure in their gut that they understand the risks they are facing.

Secondly, quantify your risk. Remember that your biggest long-term risk isn’t the coming share market crash (as we’ve shown, there’s always a reason not to invest), it’s the risk that you’ll outlive your money. Inflation is the silent money mugger that robs people of their standard of living. That’s why you need to structure your long-term investments to safeguard against it, by investing in companies that have the ability to consistently keep up with inflation.

Finally, be different. History has shown that the ultimate way to manage risk – and get rich – is to do the exact opposite of what everyone is doing. And right now no one is interested in investing (except for billionaire value investors who are loading up while prices are cheap).

I’ll bet you two billion Chindians that in twenty years time you’ll look back and wish you’d taken more calculated risks today.

Tread Your Own Path!



Photo: http://www.flickr.com/photos/3336/161072974/

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