Risks are risks because they’re risks. If that sounds like a riddle let me explain. For a risk to be a risk it has to be 100% unknown. I’m talking about the sort of risks no one sees coming. The real nasty surprises. The ones that really are impossible to predict (unless Gd gives you the inside scoop). I’m talking 9/11, ‘08, Covid.

These are things no one in their right mind would have predicted. They were entirely unknowable. And it’s these risks – if you’re not prepared for – that can wipe out years (if not decades) of your investment progress in a matter of seconds. It’s scary when you think that something, someday that no one is even thinking about (let alone planning for) can have that sort of power. 

Whether you admit it or not we’re all looking to someone, somewhere to tell us what the future risks are going to be and when they’ll happen. It’s why we cling to new year’s predictions (here’s 3 “expert” predictions for 2024 – check if any come true!) and read endless articles telling us what the global economy is going to be like.

It’s why we’re at the edge of our seat every time the Fed get together to play G-d and decide the price they’re going to put on our money (interest rate = cost of money) that affects literally everything from our borrowing to our spending to how we feel about our future.

Risk = uncertainty (which we hate)

We want to offload some of that uncertainty we know the future is so famous for. We wanna lower our risks and breathe a sigh of relief. Because we’re planning for risks. But let’s face it, we’re rubbish forecasters  – there’s a joke how economists have managed to predict 9 out of the last 5 recessions.

I mean hasn’t everyone (and their cat) been predicting we’d be in recession right now thanks to rates going vertical which clearly hasn’t happened (yet?). We’re totally screwed.

Sure, you and I can name a gazillion risks right now and we can all argue what should come up at #1. I cheated and asked ChatGPT what is the #1 risk facing us now to which it answered “it’s difficult to definitely rank them, but climate change is considered one of the most significant due to its far-reaching impacts on ecosystems, economies, and societies worldwide”.

Make of that what you will. I then asked ChatGPT what’s the #1 risk faces financial markets today. Its answer? Uncertainty around monetary policy by central banks. Oops. 

Back in 2020 which news publications were talking about Covid? Or the Ukrainian war in 2022? NADA. Point proven. We don’t really know anything. So we cling to scraps of data we get (which by definition has already happened so tells us nothing about the future) in order to ease our tummy aches when we think of the R-word.

But yeah, we’ve all no idea of the biggest risks that will pop up in the future. They’re un-forecastable. So what the heck to do next? 

Prepared for a market crash just don’t bother predicting it

The trick is to focus on the one thing you can control: being prepared rather than trying to predict – because that’s something none of us can do. However many models you use. Unless you’re G-d, you’ve got no clue what the future holds. 

When it comes to being prepared, there are 2 things that such risks force us to deal with: a) the shock that comes when something totally unexpectedly nasty hits and b) the emotional impact of losing a huge % of your life’s investments.

In ‘08, anyone who cashed in their pension in that year (incl my friend’s grandpa) will have seen their entire life’s work – aka decades of their time – vanish before their eyes. If you don’t ever see something like that coming you don’t stand a chance. 

Every 10yrs or so there will be a really bad recession. Like ‘08. One that cripples (almost) everyone leaving scars for years to come. But of course we can’t predict the why, what, or how. We’ve no clue what will cause it. It could be anything. It could come from anywhere.

The trigger is unknowable. Instead, all you know is it will come, at some point. That means when times are good you should prepare for them not lasting forever. Which is why the secret to stellar portfolio returns are built around planning for the next recession rather than timing it!

The stuff no one was forecasting

Since nothing ever does. Back in 1929 right before the Great Depression hit, no one was forecasting it. Unemployment as a risk wasn’t high on the agenda till it suddenly became all everyone was talking about. Unemployment hit 23%. This is a figure we can’t wrap our heads round. Because we’ve (thankfully) never been there.

Sure, we’ve read books about the Great Depression and that time period in general and if you’re lucky you spoke to someone who lived in that era and give you a first-hand story. Otherwise, it’s just history. And a piece of history we think can never repeat itself. 

Talking to my grandpa who’s no longer with me, he was a kid in 1929. The only thing he remembers from that era: he dropped his blanket from a 4th-floor apartment in Germany and by the time he walked downstairs to collect it it was gone.

Having that expectation that the good times will fade and once-a-decade turn into something really nasty will mean you’re anchored in reality and more importantly that you’re able to prepare for it.

Even being 60% prepared will help you massively. Depressions are super-rare occurrences (thank heavens!!) but they do happen. Recessions can be deep, long-lasting and much more damaging than forecasters predict. 

So how to prepare for something you have no idea when will happen? With zero clue as to what will cause it? 

Two things. 

But let’s start with the first: your savings. They will literally save you. Save for no other reason than to save yourself one day. (Psst: here’s the real reason the top 1% love cash so much). The longer you can stay in the game, the better your odds of success.

The trouble is when disaster strikes and stock market plummet (in what is a totally normal response!) anyone who has a) invested more they can afford to lose b) has too much of their wealth tied into the market and c) has little to no cash on the side can’t really profit all that much. Their only hope is waiting.

Not being able to invest when prices are rock-bottom. And who knows how long recoveries take. History’s shown us they tend to be a lot quicker than anyone thinks but if you can’t afford to wait for that recovery to show its pretty face, you’ll be doomed.

And it’s not just markets. Deep recessions from ugly risks no one sees coming affect something we all rely on but know we shouldn’t: our jobs. Our paychecks come from a company. When that company makes money they can afford to pay their workers – all of us!

When they sell more of their good/service they make more money so they have more profit. And so they hire more workers to cope with higher demand. But when consumers are too scared to spend that’s when trouble happens and when firms layoff workers in the thousands.

Jobs are not set in stone. Despite how rock-solid they can feel. Emergency savings seems like a silly thing to call them. It’s really your ‘if-everything-goes-wrong’ pot of savings. It’s money that will protect you from something you can’t predict. Speaking of, here’s 3 things to make sure your finances are rock-solid before any kind of economic storm hits.

Most people rely on their job as their only source of income and so if that stops, they’re doomed. It means they can’t pay their bills – the biggest and more important one being their mortgage.

Which brings me onto the 2nd thing you can do to prepare for something unknowable:

Take on less debt than you know you can afford 

Debt makes the good times better but it also makes the bad times worse. People who find themselves over-leveraged when disaster strikes can get wiped out. Mortgages are a fixed expense each month.

If your main source of paying that comes from your 9-to-5 (as it does most of us) then you gotta rely on that one job to keep paying you or else you’ll fall behind on your mortgage payments. And worse case you’ll be repossessed. Here’s how embracing the barbell strategy in your life + investing will give you the best chance at long term success.

Again, we think none of this can ever happen to us but bad times can snowball pretty quickly and being out of work for 8+ months with 0 savings puts you in a really dangerous place. 

Instead, before you take on debt, figure out the amount that you’d be able to cope with. Whatever that number is, make it smaller. Take on less debt than you can afford to. This will give you more flexibility + less reliance on any one job you have to keep delivering.

And you’ll be able to still pay your mortgage if that job gets lost along the way (with the help of your savings, obvs). Less debt = less stress. 

When you own debt you have to be sure things go well and the price you’re paying on your debt doesn’t rise more than your incomes do. Debt keeps you stuck to jobs you hate + cities you’ve outgrown. But more than being an emotional burden, it can quickly turn into a financial one.

So live a little smaller than you can. And save more than you need to. That’s it. Then you’ll be seriously ready for anything that happens.

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.