Rolling with the Punches – Part Two

Now we understand that we need to be able to adapt and deal with any challenges life throws at us, let's start thinking about what we need to do.

Identify Potential Challenges and Prepare for Them

Given that we’re talking about rolling with the punches, let’s use a boxing analogy here. I think it’s fair to say that the performance in the ring (the bout) is the product of lots of work done beforehand in training, nutrition, psychology etc. We can also benefit from being prepared for adversity before it happens. We need to think about what the main risks that you might face are:

• What if you lose your income? How might that happen? If it’s redundancy, we can build up an emergency fund to give us breathing space, knowing our bills will be paid while we look for work
• Early death? We can take out life insurance to look after our family
• Prolonged illness? Our emergency fund coupled with an income protection policy will see much of our income replaced if this happens
• What if the stock market tanks? There’s no ‘if’ about it – it will happen. You can be prepared by learning about how markets work. Read “The Simple Path to Wealth” by JL Collins and “Investing Demystified” by Lars Kroijer. Remember the stock market rewards the patient and punishes the rest
• You can diversify by using multi-asset funds, reducing your exposure to any region or asset class
• You can put in place commitment devices like Neil Bage mentioned, to prevent you selling falling assets at the wrong time

It really is worth taking the time to identify the threats you might face and planning on how you might deal with them ahead of time. I’m not saying it’ll be a fun hour, but it’ll be time well spent.

React Slowly

Knee-jerk behaviour is always a bad idea, although it can be tempting. We can even justify it to ourselves by couching it in positive terms like ‘I’m acting quickly’ or ‘taking positive action’ – but that’s rubbish. Quick action is rarely well-thought-out action, and should therefore be avoided.

You can’t act quickly enough to make any difference in the market anyway. As retail investors, by the time we place a trade instruction on our platform, markets will have moved drastically before it’s carried out.

Putting commitment devices or frameworks in place can help prevent you from having to force yourself to slow down at a time when adrenaline is pumping. If you read a terrible headline and you know your pension fund is going to take a beating, it’s easier to refrain from logging into your platform late at night and making a rash decision if you’ve already committed to never checking your investment value after 7pm, or on a weekend, or after you’ve had a glass or two of Malbec.

Remembering that whatever the current threat is, it’s unlikely to derail your plans altogether and is also likely to lead to calmness rather than panic. Above all, remember that behaviour is by far the biggest determinant of our success or otherwise as we build wealth. Reacting slowly might just save you tens or hundreds of thousands – it’s important!

Want to keep reading? Or did you miss the first post in this series?