Controlling the Controllable!
John P. Duncan
Before we dive into what we can control in an upcoming blog, let’s focus for a moment on what we do not and never will be able to control.
The short list is as follows:
- How long we’ll live
- How long we’ll work
- How long our business will exist and be profitable
- What the stock market will do
- What the interest rates will be
- What tax rates will change to
- What the government will do
- How much debt the government will create
- How much things will cost in future
There are tons of others we could mention; but, the point is there are a lot of things that are out of our control. The main issue is that we must somehow account for these and plan for the worst while hoping for the best. When the worst is accounted for, the best can come and go as it pleases without rocking the boat when it leaves.
What I have observed and learned through working with so many successful families is that our feeling of empowerment in financial affairs is directly linked to how well we have addressed the unknowns of our situation. Following this logic, those who ignore their “blind spots” feel massive stress, uncertainty, and fear. This is the exact opposite of living a healthy, wealthy, and wise way of life.
To understand this at a deeper level, think about having no health insurance whatsoever. What kind of thoughts run through your mind? I know for me it is a life-threatening illness that costs me every nickel followed by living as a ward of the state. This might be overly dramatic, but for this reason I continue to pay the premiums on my health insurance. To self-insure is not even a thought. That is something, like many others as you will see, where transferring the risk of huge medical bills to an insurance company makes more sense. Plus, bI get to enjoy life instead of fearing getting sick or injured.
This brings me to an important point. You can either assume risks by self-insuring or transfer risk to someone or something else like an insurance company. Regardless of how much you have amassed, it usually makes sense to not assume the risk of loss personally.
Poor people hold car washes or create a GoFundMe page when loved ones die to pay for the funeral. Does this mean they could not afford the premium of even basic coverage? Most times it is not a matter of cost, they simply did not prepare for the possibility that someone could actually die. According to the CIA, 151,600 people die every day of the week. This was as of 2011 and a worldwide number.
Unfortunately, even those higher on the food chain often die before their time. Like Clint Eastwood said, “Tomorrow is a promise no man can keep”. The point I’m trying to make is something that is as black and white as life is often left as an unknown that is not properly addressed. The cost of Life Insurance has dropped substantially over the last decade. But, the coverage of even the most successful is usually inadequate to replace their financial loss.
How much would replace your income?
At 5% net return, it would take $10,000,000 in revenue producing assets to replace $500,000 annual income. To be even more exact, factor inflation into equation. The numbers are larger than our brains want to figure but this is what it takes to be totally prepared in case Plan B is needed.
This again goes back to the fact that most advisors do not think in these terms, let alone these amounts. This leaves most clients on their own to either not transfer the risk and self-insure or only transfer a small fraction of the real risk away. In all my years of consulting, I’ve never once met someone who had a level of life insurance that would replace their income if they died. Add to this, the people with whom I meet are at the upper rungs of success, meaning most have better than average advisory teams in place.
A good question to ask of your financial strategy is whether or not it is offensive or defensive, or both? A great financial position is equally defensive and offensive. Most are offensive with little to no defense. The problem with an approach that does not have a defense is that it literally can be wiped out in the blink of an eye. All gains, everything can be gone. Again, this is what causes stress and heartache and can, in most cases, be managed and addressed. By doing this for your plan, you immediately enjoy much more peace of mind.
Money and sports are very similar. Defense wins championships, period. I’ll take a dominating defense every day of the week versus an offense that scores like crazy (think Houston Rockets this year). A great defense will shut down a great offense. In money, not losing is more important than winning. Or rather, one loss can decimate a once great net worth if not protected by a daunting defensive strategy.
The reason most advisors are not nearly as adept at defensive methods as offensive is simply that they are not trained to think about the negative possibilities. They are trained to sell positive outcomes. Many of them may object to me stating this publicly. But, they know it’s true and even if they don’t, looking at thousands of plans over the years has shown this to be true.
My natural instinct is to protect the downside at all costs and only then do I look to go on offensive. I would rather know that even if the worst happens, that the risk has been accounted for and does not stop the train whatsoever.
The trick is to have as strong of a Plan B as your plan A. What are the odds that Plan A will never hit a speed bump or even worse a fatal tailspin? Doesn’t it make good sense to have your Plan B tight so that even if nothing detours Plan A, you can move with confidence that even the dark possibilities are accounted for? This is how the icons of the industry move from one project to another regardless of what happened on the last adventure. Instead of “what would you do if you knew you could not fail?”, you come from “I have a plan even if things go south”.
As we continue, you will see through actual examples how you can fully address all of the uncontrollables listed above in a smart and efficient manner.
Per US Department of Defense, defense spending is $874.4 Billion for 2018 in America. Why? We are successful and unique. We have a target on our back. As your success and assets rise, the bullseye gets bigger and defense soon takes priority over offense. It does absolutely no good to buy a bunch of expensive furnishings for your home and then leave the front door unlocked at night. Unguarded or unprotected assets are the target of predators, politicians, and those who are not on your level of success.
The reason most advisors miss defense is they themselves are not at the level of affluence that you are and do not understand the risks involved. Ask a poor person if the rich should pay more in taxes, what will they say almost 100% of the time? Having success puts you in the minority and easily picked on by society at large. Another way to look at it would be to think about how much famous people must spend on security. If you were in the Rolling Stones, for example, would you walk the streets at night in the town you just played a concert in without any security whatsoever?
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