David had just finished building his $2 million nest egg. He’d mapped out his investments, budgeted his expenses, and filed all the paperwork with his boss.
The retirement date was set in stone and he was ready to go.
But then he checked his portfolio…
He saw that the money in his account had dropped from $2 million to $1.8 million in one day. He panicked, called a friend he trusted, and decided to weather the storm.
He checked again the next week and the color left his face as he realized he now had $1.2 million in a matter of days.
His portfolio dropped and there was nothing he could do about it.
Or at least, that’s what his friend told him.
False Security
You wouldn’t go into a warzone without a bulletproof vest. You wouldn’t go scuba diving without a tank, and you wouldn’t go skydiving without a parachute. But for some reason, more than two out of every three retirement accounts have ZERO guaranteed floors.
It’s legally required to buy insurance on your car and yet there’s no guarantee you’ll get in a crash. You’re legally required to insure your home even though you can’t guarantee it will burn down. But each person’s retirement account is virtually guaranteed to drop for three years out of any ten-year period. Yet people still roll the dice on their retirement portfolio.
Have you ever heard the term, “you can take that to the bank?” Well, it’s a term people use to assure others that everything is completely reliable. So reliable that the federal government would legally require the money to be honored.
Where so many people go wrong is that they think they can take their money to the bank and they just can’t.
Just because people have big retirement accounts doesn’t mean they can’t be brought down. Losses are marked by percentages, not dollar amounts. That means that the bigger they are, the harder they fall.
Real Security
What you don’t want to give up is the growth that you think everyone is going to get. What you don’t want to lose is the millions you’ve heard horror stories about. Avoidance isn’t a solution, but we also don’t need to ignore the red flags our minds naturally put up.
Each person has some sort of risk tolerance. Unfortunately, some people try to put their risk tolerance in the wrong places. Even if you’re a risky individual, it still isn’t smart to gamble at a casino. There’s a reason “the house always wins.”
And even if losing $50 would induce a panic attack, stacking money under your mattress is not a good idea.
Some things are objectively unhelpful.
Each person has a specific set of values and tolerance. Where investors get things wrong is thinking that they can offer risky solutions to conservative individuals and conservative solutions to risky individuals.
Investing is a personal choice. So the most important part of investing is understanding the person. The key question is, how much money are you comfortable losing?
The Fire Drill Effect
Let me tell you a story about a girl named Sarah who was obsessed with safety. She was a school teacher, so her kids being taken care of was absolutely top priority for her. Sarah had a particular fear of fires and imparted that onto her students by routinely running them through drills so that they’d know exactly where to go if something happened.
That made her feel safe.
One day Sarah ran out of printer paper, so she went to walk across the hall to the teacher’s lounge to get some more. She went to touch the handle. YIKES!! Piping hot. She looked outside only to find flames beginning to brew right outside her class! The world stood still. Her biggest fear had become a reality. Her heart dropped to her stomach and she could barely whisper to the classroom full of students… fire.
What alarmed her almost more was how calmly her students left their belongings, opened the window to the left of the classroom, and walked right out the door. But not Sarah…
She knew she had to do something but couldn’t think of what it was. She panicked. She ran circles in her mind figuring out what to do and where to go. She’d practiced a thousand times before but couldn’t take one step in the right direction, paralyzed by fear.
Then it hit her, “PULL THE ALARM.” She jumped over to the opposite side of the class, pressed the lever, marked herself with ink, and hurried over to the window where two of the larger boys in the class lifted her out to safety.
What went wrong?
Sarah had planned meticulously. Routinely practiced for this exact situation. What happened?!
She failed to take action.
Financial Security
Financial security is the idea that no matter what happens in the economy, you will be taken care of financially. Unfortunately, this is not the case for most individuals. Thankfully, there are only three questions to ask when establishing and remaining in financial security:
- Where are we at?
- Where are we going?
- Take action.
If you want to obsess any further than these three steps about finances, you either need to start a career in finance or go distract yourself with some other hobby. I recommend golf!
If you do these things on a consistent basis, you won’t look back with regret.
What You Need to Know
Nick, those are great terms, but what are the actual actions that I need to take to make this happen? It’s simple…
- Fill out a budget.
- Make a financial plan.
- Do the budget and financial plan.
I like to break this further into:
- Daily: habits
- Monthly: budget
- Quarterly: personal review
- Semi-annual: consultant review
- Annual: plan
Notice the time frame that each of these occur at. You’ll take financial action every day.
Do you want it to be in line with your goals, or are you not really concerned with going anywhere financially? Honest question!! It’s your life. I’m just letting you know what faithful stewardship looks like on a broader spectrum.