September 07, 2005
What Can Katrina Teach Us About Personal Finance?
Like many people, I have spent more than a few hours watching the breaking news out of the Gulf Coast region over the last week. Like many people, I have donated both money and needed items to those in need. And like many people, I find the horror that ensued as a result of the hurricane sobering - to say the least. And it makes me think - why does it have to be this way? Why is it always this way?
There has been much hue and cry about how long it has taken the government to respond to the crisis. My view is not the popular one but I think people are underestimating the time it takes to mobilize a response on that scale.
I don't care who had been in office or who was in charge, a coordinated response to a disaster of that magnitude is going to be slower than anyone wants before it ramps up. Whoever happened to be in charge when something like that happens is ALWAYS going to be made a scapegoat no matter how well or how poorly they managed the crisis. That is the nature of the beast.
Monday morning quarterbacks, with the benefit of 20/20 hindsight, can always see how it might have been done better. But the people actually doing the job never get the benefit of that 20/20 hindsight. It's just the nature of the beast.
So one after another, government officials have trotted out before the camera to talk about all the lessons we will learn when this is all over - which got me to thinking … what lessons can WE learn … you and I. I think there are at least five of them and they are tremendously important.
First, just because something is a low probability doesn't mean it won't happen. If you wait long enough, it will. That you can count on as sure as you are sitting here reading these words. I heard so many people talk about this hurricane as being the one everyone hoped would never come. In a blinding flash of the obvious I think, "Everyone knew it could happen. Why were they so surprised when it did?"
We know that humans are overconfident. Psychologists have proven it in a multitude of different studies. To a man, we overestimate our level of knowledge, underestimate risk and exaggerate our ability to control events.
In some regards, this is helpful. Progress is driven by this undying optimism. But in other regards, it is a recipe for disaster. It gives us an unwarranted sense of invincibility. Eventually, the law of probability catches up and when it does, the results are often disastrous.
With regard to our investments, I have been known to say I think hope is a terrible investment strategy and when you start making deals with god, your investment philosophy is flawed. Any time you hear yourself hoping that a low probability event with catastrophic consequences doesn't occur, that is your mental cue to ask yourself the following: "But what if it did? Am I prepared? Is there anything I should be doing today in case it does?"
Which brings me to my next point. Planning and preparing is a lot cheaper and a lot less traumatic than reacting after disaster strikes. Another blinding flash of the obvious! And yet here we are. The wrong time to be thinking about what you might have done to prevent the problem is when the storm surge is already beating against your house. By then it is too late. Whatever is going to happen is going to happen.
Many of us don't like to think about unpleasant possibilities. We don't want to plan for our own death or divorce. We don't like to think about what a twenty year bear market or an economic depression would mean to our standard of living. We don't like to think about being widowed or laid off from our jobs. But these events happen.
Buying life insurance and creating a will is a clearly lot cheaper and a lot less traumatic than leaving your family without enough money or battling one another over your assets. Having a lawyer draw up a pre-nup is the same thing. Learning to create income from your portfolio in case of a prolonged bear market is less traumatic than having to choose between life-saving medicines and eating that day when you are eighty-five years old and unable to work. Saving a little bit of every paycheck is less painful than being without a job or having to work at a job you hate because you have no cushion.
Which then brings me to the third and fourth lessons of Hurricane Katrina - and here is where I am going to say something really politically incorrect. When you fail to plan, fail to create a safety net, you are at the mercy of others. Don't complain if they don't respond in the way you wanted them to. That's number three. Number four is the choices we make determine the positions we find ourselves in.
The people who were hardest hit by Katrina were the poor - obviously. Those who had the money to flee probably did and if they didn't, they are able to afford someplace to live today. People with money are not living in Reunion Arena. Those who could not afford to flee or cannot afford shelter are in that situation because they made bad choices.
Every kid gets to make choices about whether to do their homework and do well in school or not. Everyone chooses whether to better their life and work hard or not. Everyone chooses to save money or spend it. In short, everyone makes their own choices.
I don't care how bad their family life is, how little money they have or what neighborhood they live in. I can show you people who made the right choices in those circumstances and I can show you a majority that made the wrong choices.
Do those people who lost everything need help? Yes. Absolutely. And as I said, I contributed like everyone else. But let's also call a spade a spade. That is my tax dollar the government is spending and they are having to spend it because people made bad choices. Those of us who made good choices are forced to support those who made bad choices - and that I have a problem with.
I am not saying we should withhold our support for the displaced. I am not saying the government shouldn't be doing what it had to do under the circumstances. I am saying let's stop calling them "Victims of Hurricane Katrina". If they are victims, it is of their own poor planning and bad choices.
By the way, I think I have earned the right to say that. I spent the first thirty years of my life making bad choices. I had to learn the hard way what the consequences of bad choices were. When I didn't like the situation I kept finding myself in, I learned to make better choices.
Today I save money. Today I forgo things I want today for security tomorrow. I make sacrifices so that I have a safety net for unexpected events. I believe that you are solely responsible for whatever situation you find yourself in and if you don't like the situation, you can look back and see the choices you made that got you there - no one else. And just as a side note, when you build a life that you love, you can also look back and clearly see the choices you made that got you there too. That I can tell you first hand is a wonderful feeling.
So your circumstances are the direct result of your choices. It is as simple as that. I think that is the most important lesson that we as individuals can take from this disaster.
Which brings me finally to my last point. Why is it that we only learn the hard way - it always takes a disaster, either national or personal, to move most of us to action? To get us to change what we are doing? I know that is the way I had to learn and until I did my life was just one long series of train wrecks. Why is that?
Your thoughts and comments are welcome. Post them below.
In a totally unrelated note, I just wanted to let you know that I added some new material to the Retirement Factoid page over the weekend.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.
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