A key first step towards achieving financial security is to take measures that ensure capital preservation. An investor and anyone that has worked hard to save and build a nest egg does not want to face having to start back at square one or even worse dig their way out from under a pile of debt, and I mean ever! Sadly, it is far easier than you might think to lose your wealth or have it ripped away by crooks because you invest in a scheme that turns sour or a slew of other “bad luck” scenarios. Governments and banks have entered this game by instituting laws allowing for “bail ins” where they can seize depositors accounts when an institution fails and expanding clawback rules. Capital preservation should be high on our list of priorities when it comes to financial planning and even higher as we move closer to retirement.
Capital prevention goes beyond retaining the same number of dollars, the concept extends to retaining the same amount of buying power and options. In a world where the value of things are constantly changing and being affected by outside factors, this means we cannot just bury our money in a hole in the ground. Obtaining financial knowledge and showing the discipline to take action when necessary are key ingredients in achieving this goal. Also, a little good luck goes a long way in keeping us out of trouble in this dangerous world of baffling and confusing economic theories that are full of loops that feedback upon themselves or unexpected pitfalls.
Many of the “modern monetary theories” in use today have not been proven over time but reflect an attitude that we can control economic cycles better than in the past. The basis of the economy we have today is unsustainable and because it has been able to exist for so long does not mean it can continue. The fact the system muddles through does not guarantee that we will not suffer financial harm as individuals. The policies being put forth by central bankers have massive implications for both investors and society, this is more than a game and it directly affects the lives of people everywhere. The crux of this article is not to present a recipe for achieving a safe financial future but to remind you how important capital preservation is and urge you to elevate it as a priority.
I have had the good fortune of doing far better than most people in building what appears to be a solid base and reasonable future but this is no guarantee of how I will fare going forward. The road ahead often takes twists and bends that we can neither foresee or predict. One thing has become crystal clear over the last few decades and that is the economic landscape is constantly changing this means we really are no safer today than in the past. One day you can be a hero and the next day a zero.
A term that I absolutely despise that has come into use by television moderators and the financial media in the last few years is “risk on and risk off day.” I do not feel the world is that simple or that we should try to change direction so quickly. The world has grown far more complex and interconnected opening up new risk of contagion with “debt bombs” capable of reeking destruction hidden often just out of sight. For a long time, I have been saying “debt does matter” because when debts are erased from one column or entity it is often instantly reflected somewhere else as a drop in net worth.
One of my largest reasons for concern is that I feel the numbers being presented to us do not make rational sense, the “numbers don’t work.” Newly formed entitlements mean an American born in 1945 can expect nearly $2.2m in lifetime net transfers from the “state” and far more than they pay in. A study by the International Monetary Fund in 2011 compared the tax bills of what citizens pay over their lifetime with the value of the benefits that they are forecast to receive. When you realize if a person toils for forty years earning twenty-five thousand dollars a year they only make one million dollars then the numbers become both frightening and surreal. This leaves all of us vulnerable if the current financial system breaks down and has to be rebooted or restarted under a new or drastically different set of rules.This is why we should all remember that even if we wish to continue working in our later years and are fortunate enough to be able to, that work is much more likable if you do it by choice rather than necessity,
Your comments are welcome and encouraged. If you have time please check out the archives for another post that may be of interest.
H/T: Bruce Wilds