Chapter 35
Some final thoughts on risk
If you decide to pursue financial freedom you are going to have to choose to spend your money on investments. Somehow in our culture this has come to be seen by most people as deprivation. That has never made much sense to me. Personally, there is nothing I’d rather buy or own than F-You Money.
With it, the world’s possibilities are endless and you are faced with the delicious decision as to what to do with your freedom. The only limits are your imagination and your fears.
But while it might not entail deprivation, investing does mean taking on risk.
The investing approach in this book is based on the premise that the stock market always goes up. After all, the Dow Jones Industrial Average started the last century at 68 and ended at 11,497. That was through two world wars, a deflationary depression, bouts of high inflation and countless smaller wars and fiscal disasters. If you want to be a successful investor in this current century, you need some perspective.
Some seek absolute security, but it simply doesn’t exist.
Can I be sure the U.S. economy is not about to enter the 25-year down cycle Japan is still living through? Or something worse? Nope.
Is a 4% withdrawal rate always going to be safe? Nope. About 4% of the time it will come up short and you’ll need to adjust.
What about asteroids or super volcanos or viruses or alien invaders or an ice age or the reversal of the magnetic poles or AI robots or nanobots or maybe zombies taking us out? Relax. It ain’t gonna happen. At least not on our watch.
The Earth’s been around for some 4.5 billion years. Multi-celled life has been running around for about half a billion years or so. Major Armageddon extinction events, like the asteroid that took out the dinosaurs some 65 million years ago, have happened about five times. So that’s about one every 100 million years or so.
Are we really arrogant enough to think it’s going to happen in the geological eye-blink we’ll be around? That we’ll be the ones to witness it?
Not likely.
And if I’m wrong? If any of these life—or even civilization—ending events take place, how we are invested will matter not a single whit.
This is not to say we face no risks. If you have money you have risk.
You don’t get to choose not to have risk, you only get to choose what kind.
Consider:
Stocks are considered very risky, and they are certainly volatile in the short term. But go out 5-10 years and the odds strongly favor handsome returns. Go out 20 years and you are virtually guaranteed to be made wealthier in owning them. At least if the last 120 tumultuous years are any guide.
Cash is considered very safe. But every day its spending power is eroded by inflation. Over a few years, this is no big deal and cash is absolutely where you want to keep any money you plan to spend in the short term. But go out 10-20+ years and it is a very big deal—an almost guaranteed loser.
Perhaps it is more useful to think not in terms of risk, but rather volatility. Stocks have far more volatility than cash and in return provide far more wealth-building potential. Cash has little volatility, but you pay for that in the slow erosion of its spending power.
To answer “Which is best?” you must first answer “What are your needs, psychology and goals?”
We all must play the odds and make our decisions based on the alternatives. But in doing so we must also realize that fear and risk are often overblown, and understand that letting our fear control us carries its own set of risks.
Getting past my own fears has allowed me to avoid panic and ride out financial disasters like the one that occurred in 2008. It has given me my own F-You Money. It has allowed me to indulge in my own somewhat risky passions. This book is designed to help you do the same.
Having come this far, you now have a solid understanding of how investing really works and how to realistically build your wealth. You also now understand that the road can be rocky and that plunges in the market are normal. Armed with this knowledge, such events begin to lose their power to create fear in you, allowing you to avoid panic and stay focused on your goal of building wealth and achieving financial freedom.
The Path is before you. You need only take the first step and begin.
Enjoy your journey!