Never Saw It Coming

People are very good at forecasting the future, except for the surprises, which tend to be all that matter.

Let me share a theory I have about risk and the right amount of savings required to offset it.

The biggest risk is always what no one sees coming. If you don’t see something coming you’re not prepared for it. And when you’re not prepared for it its damage is amplified when it hits you.

Look at the big news stories that move the needle – Covid, 9/11, Pearl Harbor, the Great Depression. Their common trait isn’t necessarily that they were big; it’s that they were surprises, on virtually no one’s radar until they arrived.

It’s like that every year. It’ll be like that every year.

It’s been like that this year.

The Economist – a magazine I admire – publishes a forecast of the year ahead each January. Its January 2020 issue does not mention a single word about Covid. Its January 2022 issue does not mention a single word about Russia invading Ukraine. That’s not a criticism – both events were impossible to know when the magazines were likely planned in November and written in December each year. But that’s the point: The biggest news, the biggest risks, the most consequential events, are always what you don’t see coming.

How do you live with that?

One truth is that if you’re only saving for the risks you can envision, you’ll be unprepared for the risks you can’t imagine every time. So the right amount of savings/security/liquidity is when it feels like it’s a little too much.

It should feel excessive; it should make you wince a little.

The same goes for how much debt you think you should handle – whatever you think it is, the reality is probably a little less. Your preparation shouldn’t make sense in a world where the biggest historical events all would have sounded absurd before they happened.

Most of the time someone’s caught unprepared it’s not because they didn’t plan. Sometimes it’s the smartest planners in the world working tirelessly, mapping every scenario they can imagine, that end up failing. They planned for everything that made sense before getting hit by something they couldn’t fathom.

The push to be efficient with your cash and hold as little as necessary explodes when inflation is high, because people become paranoid about losing purchasing power.

But it’s times like these when people become too smart for their own good. In the drive to become efficient they try to envision exactly how much cash they’ll need in the future, and hold exactly that amount, nothing more.

And then of course they’ll be unprepared when the inevitable surprise hits.

It’s like that every year. It’ll be like that every year.