Written by: Corey Janoff
This post was originally published on our previous blog website on July 18, 2018 and has since not been revised and/or updated.
Everyone has a plan until they get punched in the mouth. Those words were so eloquently spoken by one Michael Gerard Tyson. Former heavyweight boxing champ. Thanks to his lovely face tattoo, he is now one of the more recognizable celebrities in the world.
For those of you who remember watching Iron Mike box, you know it is hard to describe the fury and rage he fought with. He came at opponents with a firestorm of punches that rendered them helpless and often knocked out.
Sure, boxers who were brave enough to fight Tyson came into the fights with a game plan. But most of them quickly ditched their plan when they got punched in the mouth. Then there was Buster Douglas. The 42/1 underdog, who took Tyson to the tenth round and eventually knocked him out, handing Mike the first loss of his career. There were many theories as to why Tyson lost to such a lesser opponent. But let’s give credit where credit is due. Despite getting knocked down earlier (with some controversy surrounding the count), Douglas stuck with his game plan. Most of Tyson’s fights only lasted a few rounds at most. Douglas was able to withstand the torrent of blows from Tyson, get past the first few rounds, and eventually catch a fatigued Tyson at the right moment.
What Does This Have to Do With Personal Finance?
Hopefully the game of life isn’t as challenging as fighting Mike Tyson in his prime would be. However, you will get punched in the mouth at some point. Multiple times probably. How will you prepare for it and handle it?
Develop a Plan
As any professional athlete entering a title match would do, it is important to develop a plan. How will you reach your financial goals? Be sure to plan for adversity and the unexpected. Things won’t go exactly as scripted. However, if you stick to your plan, odds of success are much greater than if you ditch it the first time you get hit in the mouth. Just ask the 37 guys who fought Tyson before Buster Douglas.
Investing
I can promise you, your investments will go down from time to time. Since 1950, the US Stock Market (measured by the S&P 500 index) has declined by more than 20% nine times from peak to trough. Even with those declines, as of this writing, US stocks are sitting close to an all-time high.
If you have a long-term investment plan and determine that a portfolio of all stocks is appropriate for your goals and time horizon, how will you react when your portfolio drops in value by 25%? Will you stick with your plan, trusting that it is still most appropriate for reaching your goals? Or will you want to change your investment strategy?
If you have 30 years until you plan on retiring and your retirement portfolio declines by 20% over the next four months, what will you do? Has your retirement goal changed over those four months? Now that you have 29 years and 8 months until you want to retire, instead of 30 years, is your outlook on retirement different? Do you think it requires a different strategy?
Sure, the declines in your investment portfolio may make you feel like you got knocked down, but you aren’t knocked out. Get back up and keep fighting!
What if your portfolio rises by 20% in six months? Do you think your investment strategy for your retirement goal needs to be revisited? Are you investing in an overly aggressive portfolio?
Remember, past performance is not a good predictor of future results. Just because an investment performs well, or poorly, in the recent past, doesn’t mean it will continue that trajectory forever into the future.
If you determine a particular portfolio and savings plan to be an appropriate strategy today, there is a good chance it is still an appropriate strategy tomorrow. Unless your goals or time horizon for the goals have changed significantly, you probably don’t need any major tweaks. A slight rebalance here and there should suffice.
You will get knocked down occasionally. That is part of the game. Brush it off and keep looking ahead.
Insuring Against Catastrophic Risks
These are the things that can knock you out. Recovering from a knockout blow will be nearly impossible.
The major things that can knock most people out are medical expenses, disability, death, and lawsuits. Make sure you have appropriate insurances to protect against these things.
Medical Expenses
Medical insurance is pretty straightforward. Most people have it available through work. If not available through work, most people can currently purchase an individual plan on their own. Yes, health insurance premiums can be expensive, but it pales in comparison to the cost of cancer treatment without health insurance.
Disability
Disability is one of the biggest, underappreciated risks facing people of all ages. According to the Social Security Administration, one in four 25 year olds will become disabled before they retire.
Most people need to work and earn income for a rather lengthy amount of time in order to support themselves and their families. The ability to work and earn an income is your biggest asset. We’re talking millions of dollars over the course of a career. As long as you depend on your income, you should protect it as best you can.
What’s that saying in sports – the greatest ability is availability. If you are frequently injured and unable to play, you are not helpful to your team. Well, if you are sick or injured and unable to work, you are not very helpful to your family from a financial support standpoint. So get disability insurance.
Death
This one is pretty straightforward. If you die and leave behind people who depend on you financially, they are going to be in a tough position moving forward, unless you have an appropriate amount of life insurance.
If you have a spouse, children, parents, or anyone who depends on you financially, get life insurance. If you plan on having a spouse or children in the future, get life insurance. It is easier to qualify for and less expensive when you are young and healthy.
Also, get more than you initially think you need. If you have two young children and a stay-at-home spouse, you may think $1 million would be plenty of money to take care of them. Well, if you have a $550,000 mortgage and $50,000 in auto loans, the bank is going to take $600,000 from those life insurance proceeds right off the bat. That leave $400,000 for your spouse and children to survive on until the kids are adults and your spouse remarries or can find a sufficiently paying job. Good luck.
Lawsuits
Make sure you have adequate professional liability insurance if your profession requires it. If you own your own business, make sure you have a healthy amount of business insurance. You never know if some dimwit is going to slip, fall and break an ankle at your establishment and then try to sue you.
Get more than the minimum liability limits required by your state on your home and auto insurance policies. In addition, purchase an umbrella liability policy through your home/auto company. That will provide an additional layer of protection on top of your home/auto policies in case someone tries to sue you for personal liability. If you own rental properties, this is a must. It may also be wise to hold the rental properties in a separate LLC or trust to limit the amount at risk to only that asset (instead of all of your wealth if you own it personally).
Expect to Get Knocked Down and Protect Against the Knockout Blow
Imagine you are a boxer in this game of life. Throughout your career, especially early on, many of your opponents have more experience than you and will knock you down from time to time. Develop a plan to go the distance and make it to the finish line. Every time you get knocked down, shake it off, get back up, and keep going. Just because you get punched in the mouth once doesn’t mean you need to ditch your plan.
Also, make sure you protect against the knockout blow. Maybe you do get knocked out, but you don’t want it to reverberate and knockout your family as well. Plan for that, so they don’t have to figure it out on the fly if it does happen.
