When you come to think about it, almost all decisions in financial planning come down to weighing up the probable against the possible. Failing to reach the right conclusion can result in missed opportunities on the one hand and financial disaster on the other. Extreme example? Let’s say you decide to celebrate your retirement by taking a trip to a casino. After a few champagnes you consider that the modest $100,000 you have accumulated in your pension plan is not sufficient to provide you with the lifestyle of your dreams once you were free of the shackles of the workplace. (Indeed such a sum would not last the average expat 5 years, even in Bali.) So you decide to place your entire life savings on number 8 on the roulette wheel. It is possible that you will win, and if you do you will be looking at a retirement bounty of three and a half million dollars instead of the meagre $100,000. But your chances of winning are only 1 in 36. The probability is that you will lose. People have been known to ruin their lives by taking such risks.
Many take similar risks with their families
While not so dramatic, many breadwinners still take huge risks with the financial future of their families, this time by staking all on a probability and failing to stake a little on a small possibility. That possibility is sudden death or disability that could result in severe hardship for a family for the rest of their days. Of course in this case the odds of such an event are not stacked against you as they are in the casino. In fact they are reversed, but a 1 in 36 chance of dying prematurely or becoming totally disabled early in life is probably a fair measure of the risk. Many will say the risk is so small it doesn’t warrant the expense of taking out insurance, but the fact is that several out of every hundred people will be struck down by the cruel hand of fate. Statistically the probability is low, but the consequences of not taking out protection are too dire to ignore. Fortunately, for those who are relatively young and in good health, life insurance, even for cover of a million dollars, is relatively inexpensive.
Is a serious illness or accident possible?
Of course it is. And if you ride a motorbike in Bali the possibility of an accident becomes more of a probability from all the cases I have known! Yet hundreds of expats in Bali still have no medical insurance. This is almost as bad as gambling your life away at the casino. And indeed I have known of a number of sad cases where death occurred as a result of inability to pay for essential medical care or evacuation. I have to say that when you get into your late sixties the cost of medical insurance can become prohibitive. Yet so can the cost of medical care! The only advice I can give is to build up a cash reserve for funding medical costs years in advance. Or be prepared to return to your home country if they will still treat you or accept local standards of care.
Preparing for retirement
No-one thinks too seriously of retirement when they are in their thirties or even into their forties. It is an event just too far away to get bothered about. On this subject people often fail to distinguish between probablity and possibility. The most common attitude is ‘I will probably be alright; no need to make any special effort at this time.’ The possibility of descending into abject poverty in old age is considered remote. Yet millions are in this situation right now in the western world and millions more will join them as populations age and governments have less and less to allocate to the aged. The reality is that most people, including well-paid expats, are not prepared for the probability that they are making insufficient provision for retirement.
Stock Markets – is now a good time to invest?
Needless to say, this is a question I am asked several times a week. My answer is generally that if you are looking at the short term no, if you are looking long term, yes! But what are the chances of getting the timing right to make a killing at this point in time? Markets are still down between 40% to 60% from their peaks of mid 2007. So the probability is that they are going to rise. But it is also possible that they will fall further. If we compare where they are now compared to three other ‘bear’ markets, namely 1929–32, 1973–74 and 2000–03, the fall most closely matches that of 1929–32, the Great Depression. If the current bear market continues to mirror this one we are in for a further fall to over 80% below the 2007 peak! Most observers, however, rank this recession with that of 1973–74. At this point in that recession the markets picked up sharply so if you stay out of the markets now you could be missing a great opportunity. But while the probability may be strong, the possibility of a further downturn cannot be ignored so it would be unwise to throw all your pent-up cash at the markets right now.
What about investment in business?
Always a high risk area but one that can bring great rewards to the minority who are successful. Here it is essential to weigh up the probabilities against the possibilities. Another way to look at it is to assess the opportunities against the threats. Turn a blind eye to either and you could be a loser. Assess both correctly and you stand a good chance of success.
No-one succeeds in life or investing without accepting a certain level of risk. The secret is to manage that risk by a careful evaluation of probabilities and then act accordingly.