Baby Boomers – Don’t be Fooled by Randomness

I’m just reading Nassim Nicholas Taleb’s great book, “Fooled by Randomness”. It’s sub-title is really what is relevant to Baby Boomers and is, “The Hidden Role of Chance in Life and in the Markets”.

I love reading books like this and I’m sure many will tell me to “get a life”. Learning to understand how our minds work and how we react to events in our lives is fascinating to me. Even more so when life is wrapped up in the game of chance as it surely is.

Most Baby Boomers don’t think in terms of probabilities of outcomes and the part luck can play in any outcome. Wealth Managers often appeared skilledThe hidden role of Chance in Life and in the Markets in Bull Markets when in fact they may well have been just lucky.

I’m still part way through the book but am impressed enough to urge Baby Boomers to get it and read it. It should open your mind to the way risk and luck can play such a big part in our lives and our retirement nest egg.

One particular statement early in the book rings true for me and I think should be pasted on that wall in your office along with some other stuff I have said in the past.

It is…

“It doesn’t matter how frequently something succeeds if failure is too costly to bear”.

The relevance this has to our retirement nest eggs is paramount in my mind. Over the long term you can have 30 years of growth in your portfolio. But just when you start to use it to live off, your luck can run out and you can suffer a significant loss to your nest egg, if you do not take some action to protect it.

You will recall it is not the fact that a loss occurs that is important. It is the severity of that loss, the total dollars you lose that is far more important.

So if you are about to retire or are in retirement you need to take precautions because a large loss to your nest egg is a failure too costly to bear.

If you have a Buy and Hold portfolio with a high exposure to risky assets then start to reduce that exposure or at the very least take some money out and put it where you can live off it safely for 3-5 years.

Please note the wealth management industry defines a balanced portfolio as one that can have as much as 70% of your nest egg in risk based assets like equity and property funds. I don’t call that balanced, I call it high risk.

My view is you need to reverse these percentages and only have 30% in risk based assets along with 3-5 years worth of pension payments tucked away in safe assets that you control not your wealth managers.

Unfortunately much of what I am saying may fall on deaf ears. People want to hear how much they are making in their portfolios and not how well their portfolio is protected from large losses. That’s being very negative and you should look on the bright side so I am told frequently.

Well to my mind avoiding large losses is looking on the bright side. I know I am smiling right now earning up to 8.88% in a tax free account until I think it is safe to put up to 30% of my money back in the markets 😉

Also no one will thank someone for protecting them against something that might not happen, (this time it did happen though) only to see they might have missed out on a large profit to their nest egg.

Unfortunately it shows a complete ignorance or misunderstanding of the risk to a Baby Boomer nest egg when they are in retirement, if they do not take steps to protect it.

Taleb is an options trader which is a very high risk business. What is strange is he is extremely risk averse and his primary objective is to limit his losses rather than going for high risk high returns. He makes a lot less money than others in his field but he is still trading when most others end up crashing and burning because in his words, “they are fooled by randomness”.

He keeps all his own money is government treasury bonds too. This is a person who trades for a living. How risk averse it that?

Your buy and hold portfolio with admittedly historically good returns may well be due to chance or luck. If it is then in retirement you cannot rely on luck. You need to take control of your nest egg to limit or avoid that one failure that might be too costly to bear.

Get the book and read it is my advice.

3 Responses to “Baby Boomers – Don’t be Fooled by Randomness”

  1. […] now is the time to read “Fooled by Randomness” reviewed in an earlier post. Remember, “It doesn’t matter how frequently something […]

  2. […] prices. They never expected a massive drop in house values – a black swan event as Naleb of “Fooled by Randomness” fame might say. But it happened and their flawed modelling went out the […]

  3. […] Unexpected” is a very now term since the release of Nassim Taleb’s great books, “Fooled by Randomness” and “The Black […]

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