Howard Marks is one of the most successful investors of the past 40 years. His firm, Oaktree Capital, is worth over $8 billion. Marks is a great writer, too. One of his pithiest quotes is, “You can’t predict. You can prepare.”
Marks was talking about investing markets. The markets are unpredictable, but you can still prepare intelligently. However, Marks’ wisdom applies to the entirety of your money life.
We don’t know the future. But we can prepare for it nonetheless. And here are five important examples to prove this idea.
1) The Budget
The point of a budget is to prepare for the month(s) ahead. You don’t know exactly what will happen. But you can prepare for the most likely eventualities.
Mortgage, groceries, car payments—all likely. Next Christmas is coming, as are the expensive gifts you will be buying. Your next vacation falls in the same bucket.
Your budget gives your dollars a job. It prepares them for future work. Preparation is the essence of budgeting. That’s why it’s so important.
But what about expenses that you can’t prepare for?
2) The Emergency Fund
Your emergency fund is an extension of your budget.
Budgets help you plan for knowns. Rent and dog food and 99% of the things you buy…those are items you know you’ll buy in the future. They are expected. Easy to prepare for.
An emergency fund exists to cover unknowns. Long-time readers of The Best Interest know my go-to example: my furnace might die this winter. It’s not something that I can predict. If I could predict it, I would replace it now.
But I can prepare for the possibility. The same goes for the possibility of my car dying. Or Kelly and I finding ourselves sleeping in a 40°F Airbnb.
There are many possibilities in life that are 1) unlikely but 2) painful if they do occur. Low probability, high impact.
The point of an emergency fund is to prepare for the fact that those unlikely events could happen. You can’t catch everyone unknown in your budget. An emergency fund is the next-level safety net.
I don’t want to break my leg. But if I was uninsured, it could cost me $17,000 – $35,000. Wow. My emergency fund isn’t that big.
That’s why insurance is important. My current insurance plan says, “If Jesse pays the first $1,500, then insurance will cover the rest.” My emergency fund is large enough to cover the deductibles on my various insurances.
I’ve chosen to prepare by paying $100 in insurance premiums every month. Why? Because I can’t predict when I might suffer injury or illness.
Same goes for a tree limb destroying my roof. That’s why homeowner’s insurance matters.
Same with car insurance—they’re called “accidents” because you don’t intend for them to happen.
And the same for Sadie getting bit by a rattlesnake (heaven forbid!).
Insurance is the ultimate way to prepare rather than predict.
It’s Not All Bad
Our instinct (or at least my instinct) is to view Howard Marks’ wisdom pessimistically. You can’t predict bad stuff, but you can prepare for bad stuff. And that’s fine. Bad stuff—like the stuff above—is worth preparing for.
As regular reader Chris likes to say, “The question, ‘What if everything goes right?’ isn’t worth spending too much time on.”
But Marks’ suggestion does also apply to good stuff. Let’s look at a couple example.
Why do I invest? It has nothing to do with predicting the future. If I could predict the future, I’d be “summering” in my Bitcoin-funded Adirondack chalet, not writing to you people 😉
But seriously, we can’t predict the future (…right?!). But we can prepare for probable eventualities. For example:
- I’m prepared for our economy to grow like it has in the past
- I’m prepared for business ingenuity to create capital growth
- I’m prepared for both ups and downs…but more ups overall
It’s not a guarantee. It’s not a sure bet.
But I believe all three of those projections are likely to occur over the coming decades. That’s why I am preparing for them by investing now.
5) Diversification in Investing
Going a step further, my investments are not concentrated solely in stocks. (Here are my asset allocations.)
Why? Why diversify?
Because the ability to periodically rebalance an investment portfolio has proven to be an effective risk mitigation technique in the past, I want to be prepared for that to be true in the future, too.
Again—it’s not a sure bet. Over the past 18 months, my diverse portfolio has performed worse than a 100% stock portfolio.
But diversification is something I believe will be important eventually. I’m not sure when. I can’t predict it! But I want to be prepared for it.
Marks My Words…
Ok. Bad pun. Nevertheless, mark my words: preparation is vital precisely because we can’t predict the future. Whether you want to assuage the bad or accent the good, preparing your money life is something you should do today.
- Create a budget.
- Grow an emergency fund.
- Understand your insurance.
- Invest! And better yet, do so diversely.
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