Flattening The Curve

I don’t even know if this qualifies as clickbait. I understand that the title may have stirred some feelings inside of you (and depending on which side you place yourself on the Covid-19 spectrum, these feelings may be reassurance or anger), but I assure you, the blog post has (almost) nothing to do with the pandemic.

It talks about a different type of curve, namely your net worth. And by “flattening” it means managing spikes, more specifically downward spikes (although some very rapid upwards spikes may be dangerous too, see below).

When The Shit Hits The Fan…

… Buy more fans. Or, in other words, make sure the shitstorm won’t catch you unprepared.

It is only a matter of time until some of your fans will be hit by some shit, but the secret here is to have more than one fan around you. While you clean the spoiled one, you may still enjoy some comfort.

Enough with metaphors, let’s get practical.

Suppose you make some decent income for some time now, and you decided to save some. Also, you started some small investment. If you are really loaded, maybe started to extend in real estate, buying for renting. From a distance, things look really neat.

But then something happens. Like, I don’t know, a pandemic. The stock market is hit, real estate plunges, and you can only rely on your savings. That’s a serious downward spike. Even if you did do the right things, like diversifying your investment on different assets, you’re still going to get hit.

How would you mitigate this? How would you make sure that you survive such a black swan event?

Well, portfolio balancing works better when it’s split across systems. Instead of hedging with different assets, but inside the same system (like different stocks, inside the stock market), it might be better to try hedging on assets in completely different systems. The most obvious one here is crypto. Will leave aside the insane speculation, all the lambo or FUD stuff you get, and focus only on the last 10 years picture. If you bought the right stuff during this 10 years spectrum, you would be up. No question asked, no strings attached, you would be up more than anything you had invested in the stock market. So, this would be a working hedge. You wouldn’t experience a downwards spike at all, or maybe just a little one.

How far apart the systems should be is a question of how much you know about the said systems and your overall risk appetite. But the more distant, the better.

If two islands are at a reasonable distance, then no matter how high the ripples, there won’t be any tsunami, you’ll be safe.

How About Upwards Spikes?

An upward spike is an equally unexpected event, only generating positive imbalances, like a significant unpredicted increase in revenue. It’s like holding a few millions of Doge in 2018, for which you spent just pocket money, without any expectations whatsoever, and waking up in 2021 a millionaire. That’s also a swing, and I would say even a more dangerous one.

If you’re not prepared to manage such a big change, you will most likely get passed on, it won’t stay around. Even if you see it in your balance sheet, it’s like someone put it there by mistake. You either spend it foolishly, thinking “you made it”, or don’t touch it all, and just look how it vanishes on the next bear market cycle.

Flattening the curve on the upside is not done by balancing across systems, but by changing mindset. Thinking in scenarios, instead of fixed goals. Instead of “I wanna be a millionaire”, you should start thinking “how many ways to become a millionaire really are, and how much do I know about any of them?”.

It’s a very powerful change, to start thinking in scenarios, because it teaches you to act outside of the box, to manage unexpected situations all across the spectrum, being them sudden loss or sudden gain.

So, if it still happens to be hit by luck, and you did your homework and learned how to think in scenarios, you won’t be taken by surprise. It won’t be like someone put those numbers in your balance sheet by mistake. It’s just another scenario.

Oh, and one more thing. Flattening the curve means you still have a curve, an ascending one, that you want to keep riding with as little energy as possible.

Photo by Artur Pokusin on Unsplash

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