Fragility, again

Last week I wrote about losing stuff, and how to think about the risk of ruin in your investment portfolio. Today I’m going to write about a topic that I hope is completely useless to everyone reading this. And I promise, this is the last week I’m going to be such a downer!

It’s been a heavy start to the year for many of my friends, family members, and clients. Several unexpected deaths and health emergencies have impacted people I am close to. The ultimate fragility is the fragility of life.

Low Risk Rules is about taking risk… intelligently. This requires, first and foremost, to have a foundation of safety in place in case the risks you take don’t pay off. Nothing can throw off a plan like an unexpected illness or a premature death.

This is why I constantly remind people to have adequate insurance coverage in place to protect against disability and death. (And I don’t even sell insurance!) Knowing that you’ve got that safety net allows you to take measured risks, both in business and in your investment portfolio, without worrying about being thrown off track if the worst comes to pass.

If you’re in your working years, have enough insurance to pay off your family’s debts, get your kids through school, and supplement several years’ worth of income (depending on your spouse’s employment status and income level). This allows you to risk your current surplus in business ventures or in the equity market with a clear mind.

Without adequate insurance, you are exposing yourself to risks that you don’t have to take. Your family will have enough to worry about when you’re gone. Don’t let your finances be another one of those things.

Headache investments

Do you have a lot of investments in real estate? How about private companies? How about funds with limited liquidity provisions and long lock-up periods? How about funds that can restrict your ability to make withdrawals in bad markets?

These can be a headache to manage, and you know this.

Now imagine that you’re gone, and the task falls to your executor. Maybe it’s a friend. Maybe it’s a spouse. Maybe it’s a corporate trustee who bills by the hour.

The more complicated your estate is, the more of a hassle you leave behind for your family to manage. They may have to navigate the minefields of shareholder agreements, estate and trust laws, and obscure tax rules. They might have to wait for liquidity events. They might have to negotiate sales with counterparties who have much more information about the investment than they do.

It’s going to be something else that the people you leave behind will have to fuss with, at a time when they will have their hands full adjusting to a new life without you around.

Generally, the juice isn’t worth the squeeze. Are the headache investments worth it?

Simplify

I see a lot of people who have been successful investors for a lifetime, who come to me to help simplify their affairs as they get older. Something about watching friends and family pass makes your own mortality very tangible, and this often results in a decision to shed the things that don’t matter.

A simple portfolio of publicly traded stocks and bonds can be a strong performer, protect and grow capital, and most importantly, create an estate that is very easy to administer and wind up. This means your heirs don’t have to wait for illiquid investments to sell, and they will save on the professional fees necessary to manage and wind down an estate.

Less stuff. Fewer obligations. Reducing focus to the essentials. These are the things that come from a growing realization that we won’t be around forever.