My brother–a health-conscious healthcare worker and host of a plant-based podcast–posed a very interesting problem to me. It focuses on how a person’s risk posture combines with the randomness of life to affect the outcomes in their life. I’ll pose the scenario to you, but first, let me clarify that term: risk posture.
What I mean by risk posture is the behaviors, choices, lifestyles etc. that we choose to lead, and how they can steer the course of our lives in various directions. It’s a measure of security.
Take the hobby of running. In general, running keeps you healthy. Good risk posture. But if you run on the highway, you’re probably increasing the chance you get thumped by a Chevy. Bad risk posture. But now, onto the good stuff!
Imagine three groups of 1000 people each. The first group is full of healthy, strong athletes. The second group is less physical…perhaps a bit chubbier, not as strong. And the third group is downright overweight, uncoordinated, and unhealthy. Can you guess what risk postures I’m thinking about here?
Now, imagine that all of these 3000 people make the same simple mistake: one day, they misstep on the sidewalk and roll their ankle on the curb. Ouch!
What happens next? Just like in real life, randomness takes over. In other words, a variety of outcomes will occur across the groups. Some people will break their ankles. Some people will stumble and trip, yet walk away just fine. Looking at individuals, it’ll be difficult to tell if there’s any pattern in the results.
But when we compare group to group, some clear patterns will emerge. By far, the healthy and athletic group will have better outcomes. That is, fewer and less severe injuries. The unhealthy group will have worse outcomes i.e. more severe injuries. In other words, being out of shape will increase the chances that you get hurt.
In this hypothetical, an individual’s risk posture doesn’t guarantee their outcome, but it does change the probabilities of certain outcomes. And within a large group, randomness will smooth out, and the results will show some clear and orderly risk posture patterns.
Risk posture in personal finance…
The topics I discuss on the Best Interest come with a huge disclaimer: results not guaranteed. Nothing is for certain. And that’s because the choices we make rarely guarantee an outcome, but instead change the likelihood(s) of outcome(s).
Take the behavior of saving from a young age. This is a behavior that has proven to be effective based on historical data. And it’s likely to be a better behavior than never saving at all. It’s a good risk posture! But saving from a young age doesn’t guarantee wealth, nor financial security. In other words, it’s hard to predict the future. Saving simply increases the probabilities of good outcomes.
Many personal finance and FIRE aficionados are familiar with “The Trinity Study.” In the study, some economists looked at large sets of historical data and concluded that an annual spending of 4% of your retirement nest egg is likely to be successful. By “success”, they mean “not run out of money over a 30-year retirement.” The market’s past ups and downs (mostly ups) suggest that 4% is likely a safe risk posture. Hence, you might have also heard “your retirement nest egg should be 25 times larger than your annual spending.” 100%/4% = 25
But, the Trinity Study doesn’t guarantee anything. It simply suggests a behavior (4% annual spending) that is likely to lower your risk of failure. Depending on risk tolerance, some people choose to spend more or less than 4%, which means those people have to ensure they retire with sufficient funds in the bank.
Some people smoke and live until 95. Other people are vegan marathoners and die from a congenital heart defect. Does this mean that smoking is good? And that vegetables and exercise are bad?
Some people spend their money on the Lottery and win. Some people with 401(k)s lost half their retirement in the crash of 2008 (although they’ve since tripled up their money!). Does that mean gambling is good, and saving is bad?
Don’t let the results of an individual cloud your judgement. Ask yourself, “If I compared 1000 smokers against 1000 vegan marathoners, which group would have better health outcomes?”
Or perhaps you should query, “If I compared 1000 401(k) maximizers against 1000 degenerate gamblers, which group would have a better financial outcomes?”
Not much in life comes with a guarantee. For everything else, the best we can do is maximize the odds in our favor–towards good outcomes, towards more free time and more flexible choices. We can improve our risk posture. We can strengthen the security in our lives.
What can you do to improve your risk posture?
There’s not a concrete action here, like “Take $100 dollars and invest in VTSAX.” Unfortunately, it’s not that easy.
Instead, consider basic, everyday actions. Right off the top of my head, I think of:
Is there something you can do that will improve your long-term outcomes in these behaviors? I bet there is.
For example, you might have a randomly weak heart. It’s genuinely sad, but it happens. If you exercise and eat well, you’ll increase your odds that the heart defect never impacts you. If you eat lasagna like Garfield, you’ll hurt your odds. The probabilities still lie somewhere between 0 and 1–that is, between certain death and certain survival–but your actions still matter.
From a financial point of view, advice like “save more” and “spend less” are useful, but a bit ethereal. I encourage you to look back at previous blog posts for actionable tips on saving, budgeting, dealing with debt, etc. There’s a healthy backlog of good advice here on the blog.
Other than those old tips, all I have to offer is introspection. Nothing super concrete. But please let me know if you prefer the solid numbers and actionable suggestions, because I enjoy writing about that stuff too (clearly).
And as always, thanks for reading the Best Interest.