Continuing the theme from last month’s post, in a recent NYT magazine article, Madeline Albright said, “I’m an optimist who worries a lot.”
We should be optimists because, in general, economies grow and life gets better (see Triumph of the Optimists). But we should worry about risks in the short run. The concept of “permanent impairment of capital” is relevant here. While you should expect success, you should avoid risks that, if they occurred, you could not recover from (hence the “permanent”). So, it’s okay to be predominantly exposed to stocks, but not exclusively, and only in a diversified manner. Also, buy appropriate amounts of life insurance, disability insurance, umbrella insurance, etc. Have an adequate emergency fund. Save more than might seem to be strictly necessary.
Another key phrase in financial planning is, “but what if it doesn’t” and variations.
Some examples you may have heard or said yourself:
- Stocks have earned 10% a year historically. (But what if they don’t?)
- I plan to work until 70. (But what if you can’t?)
- My job is safe. (But what if it really isn’t?)
Bottom line: “Expect the best, plan for the worst, and prepare to be surprised.” – Dennis Waitley