Notes on the Financial “Crisis”

There’s a rather entertaining piece in today’s Wall Street Journal which highlights how some people are reacting to the recent turmoil in the U.S. financial sector. Just a few examples:

– A software engineer decided to go on a sudden spending spree and “bought a $350 juice extractor and a $700 bicycle, spent $600 on four pairs of pants, and then splurged on a trip to Japan”

– A financial trader quickly converted his assets into gold coins which he currently keeps hidden in his house

– A middle-aged couple whose $1 million pension fund account lost $170,000 this month are now frantically scrambling to reallocate their nest egg into less volatile investments

Although the responses may be different, each one has its basis in the same underlying emotion – namely fear of loss. I’d like to take this a step further. In my opinion, the current financial “crisis” and subsequent “panic” is largely due to the fear of loss of a comfortable and predictable lifestyle.

I am in no way suggesting that people should not plan for the future or should forgo having solid financial goals. In fact, I am one of the strongest advocates of creating and maintaining individual wealth. However, the problem arises when this “nest egg” creation serves as a “be all end all” source of comfort and security – and it does so to the detriment of other more fundamental areas of your life.

Here’s an exercise that I like to do every once in a while just to stay sharp. I refer to it as the “desert island” or “reverse lottery” scenario. Basically, it goes like this: Imagine that you lost everything you had – no house, no car, no job, no checking account, no credit cards, no 401K, no clothing, no family, no friends, no identity, no nothing. Just you alone in some remote part of the world.

How would you survive on a moment-by-moment basis, and how effective would you be at reconstructing your life? Or rather, have you optimized yourself both physically and mentally so that you could immediately adapt to and flourish within a new, uncertain, and even chaotic environment?

The key is that many of the currently panicking masses haven’t devoted enough time and effort to addressing these fundamental areas of their lives. So during times of diminished comfort and security, they often lose their bearings – and their rationality.

Remember – while comfort is a desirable state, it’s also a highly fleeting one. Plan for the future, but always prepare yourself physically and mentally to quickly and effectively adapt to the uncertainty of the present moment.