I’ve been thinking a lot about risk lately.
I have to imagine everyone is thinking more about risk this year.
After all, risk is nothing new. Entire industries (insurance agencies and banks) are predicated on the belief that shit happens, you better be prepared for it. But was the best underwriter in the world prepared for a pandemic?
Sure, historians, epidemiologists, and public health experts knew a global virus could occur at any moment, (naturally or nefariously), but even those people are human, and humans get complacent. Especially when public health emergencies had been on a steady downward trend for many years.
As Morgan Housel describes in his post, The Big Lessons From History, “It’s hard to convince someone that they’re in danger of a risk they assume had been defeated.” I know I would have bet against an unknown virus from a remote village in China transmitted by a bat affecting my life in anyway if you had asked me a year ago. But here we are (stuck at home a year later) due to the roll of the dice.
I don’t need to waste anymore pixels talking about how everyone was surprised by COVID-19. But I would like to talk about some risks that are just as hard to see, just as impactful on a personal level, and far more likely to happen.
The risk of not having enough money at key moments in your life.
Retirement is the most obvious milestone for which you’ll need enough money. Having to work for an extra 5 or 10 years because your retirement account isn’t as funded as it needs to be will come as an unwelcome discovery as you approach your golden years.
Running out of money because you live longer than you were planning is also a very real risk at a time in life where you can’t just easily go land a new job.
You can do a few things to combat this risk. If you are still relatively young (meaning between 20 and 40 years old), you can double down on your saving. There’s no one-size fits all numbers, but here are some helpful guidelines to follow from retirement advisory firm T. Rowe Price:
(By “saved” it means in a retirement account generating returns.)
- You should have half of your salary saved by the age of 30.
- You should have your full salary saved by the age of 35.
- You should have 2x your salary saved by the age of 40.
- You should have 3x your salary saved by 45.
- You should have 5x your salary saved by 50.
- You should have 7x your salary saved by 55.
- You should have 9x your salary saved by 60.
Another way to easily keep this risk at bay is to only spend half of any raise you get throughout your career to reduce the risk of lifestyle creep. This means you’ll need less income in retirement to maintain the same quality of life. To make it simple, whenever you get a raise, save at least half of it before spending the additional money.
How to Manage Lifestyle Creep (And Still Enjoy Your Money)
When lifestyle creep becomes an issue and when it’s okay to spend more. (3 min read)
Some other moments in your life that may require a substantial amount of money are the unlikely but serious threat that you lose your job or have an unforeseen health issue. Be prepared for anything.
The risk of investing in startups.
With lower interest rates on savings accounts and bond yields at historic lows, the search for a higher return is like a gold rush. Stocks, NFTs, SPACs, and micro-caps are all available for the risk takers out there.
I personally chose a clinical stage pharmaceutical startup for my biggest risk last year. While knowing all of the potential downsides, I still invested more than I should have.
When the FDA issued an unfavorable, preliminary notice about their new drug, my investment was cut in half. A few weeks later, the FDA issued a formal notice and it was cut in half again.
There is no hell like the cloud that hangs over every moment when you’ve made a big mistake like this. All those hours I worked to make that money. All the vacations or items I could have used the money to purchase. My confidence as an investor dropped through the floor. But that was always the risk.
It’s like that first crash you take on a bike after the training wheels are off. The lesson is now burned into my brain. But the thrill of riding down a big hill on two wheels is just too good to pass up. But next time I’ll wear a helmet.
Don’t get carried away, stay the course, and never invest more than you are comfortable losing.
The risk of choosing one job over another.
Opportunity cost knocks when you are comparing two distinct, yet related choices such as one job over another.
Choose job “A” in your local area and guarantee a familiar culture, close proximity to friends and relatives, and the fact that with less competition comes a lower salary and potentially less opportunities for advancement.
Or choose job “B” working for a Fortune 500 company in a big city on the other side of the country. Guarantee yourself a prestigious LinkedIn profile, a six-figure salary, and the fact that you’ll lose all your strongest social connections overnight.
There are risks in either choice and the grass will always be greener on the other side.
No matter which path you choose, you’ll be presented further forks in the road that you aren’t even aware of yet. Doors will open that you couldn’t possibly know existed when you started out.
The risk of cyber-warfare.
I recently published 9 Cybersecurity Tips for Keeping Your Financial Accounts Secure. That’s personal stuff and although nothing globally catastrophic will happen if your bank account is hacked and your identity is stolen, it’s still a very possible risk that you should do everything to understand and protect against.
But I’m also fairly confident that cyber-warfare occurring in our lifetime is not an “if” but a “when”.
The amount of essential and strategic services that are built upon legacy software and hardware is staggering. Think about all the power plants, energy grids, dams, nuclear facilities, hospitals, banking infrastructure, GPS, and emergency responders that are still using Windows XP.
They are incredibly expensive and complicated to upgrade, and are therefore prone to all sorts of risk not just from targeted hacks, but simple operational failure. These are called SCADA systems (supervisory control and data acquisition) and there are security measures protecting them, but not nearly enough.
Last year it was COVID-19, but next year’s shutdown may occur due to ransomware. As more services are moved online and remote, the likelihood increases. The risk is real but rarely talked about because it’s taken for granted.
(This also makes investing in cybersecurity firms such an attractive place to park long-term money.)
The risk of losing control of your attention.
This is perhaps the most nebulous risk I’ve been thinking about lately, but maybe the most important. From my point of view, this is the risk I am least prepared to deal with and one which affects my life in many subtle ways.
Social media, new technologies, billion dollar ad companies, Ivy League marketing majors, remote work, and the digital connectivity of our lives is an unstoppable flywheel.
Flywheels are heavy and require lots of force to begin spinning. But once the the wheel is in motion and at a high speed, it requires an incredible amount of counter-force to stop it.
The more I read about history and biology, the more I think we are ill-equipped to deal with the ramifications of so much stimuli. Without acknowledging the risk this poses, it’s really hard to counteract.
I’m confident we will get to a place where it’s thought of like cigarettes, but I think the damage wrought in the meantime will be irreversible on our current generations.
If left to my own devices (pun intended), I check my work email 200 times a day. If the stock market is open, I’m looking up prices. If I don’t have my phone in my pocket when I leave the house, I’ll go back to get it.
I could scroll through Instagram for 20 minutes, close it and put my phone down, only to grab it moments later and open Instagram before realizing that I had just checked it.
Being aware of the fact that my attention deserves my attention was something I only very recently figured out. Through a combination of psychotherapy, meditation, and a quarter-life crisis, I’ve become far more present and connected to my surroundings.
Sounds, sights, thoughts, and time seem to all take on entirely new meanings thanks to simple mindfulness practice.
Acknowledging the risk of having not lived my life the way I had wanted to live it when I look back and how correlated this was to my lack of control over my attention was easily one of the most impactful discoveries I’ve ever made.
Life’s all about risk, hedging against it, and the underrated benefits that comes from treating it as just another law of nature.
Just remember: every risk is an opportunity. There are two sides to every trade.
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You thoroughly understand risk well. Things like NFTs and SPACs are certainly out of my risk tolerance, but it’s good that I recognize that. Cheers to taking other calculated risks that hopefully will pay off in the future!
Yes, precisely! All risk is what we pay for long term returns in the future.