Wear a helmet (The Financial Athlete #127)

A road biker does not put on a helmet because he is overwhelmed by fear of reckless drivers or poor road conditions to cause him to crash. He puts on a helmet as part of procedure to prepare himself for the ride. Protection by wearing a helmet is an automatic action; and it does interfere with the ride.

An Investor should know how to protect himself. Like a helmet, protection should be an automatic response and not interfere with the process of investing. An Investor needs protection from unforeseen circumstances, financial predators, and perhaps above all, himself.

1. Unforeseen Circumstances

Health care insurance, life insurance, homeowners insurance, and rental property insurance…don’t do without these (if applicable). These protect the financial well being of you and your family. The worst of all possible scenarios can happen, and insurance guarantees your wealth is protected from a potential huge liability or severe illness.

Always rent a house with rental property insurance. Better yet, add on an umbrella policy to cover additional potential liability. Never think of insurance as a cost for “false fear”. Think of it as the cost of doing business.

As for stocks, the best “insurance” is to buy at a reasonable value the shares of companies with sustainable competitive advantages. Another form of “insurance” comes in the form of diversification. However, the financial industry over-prescribes diversification into stocks. When you are over-diversified, you own too many bad stocks. The financially literate with the time and interest to do due diligence should only invest into 10-20 strong companies in various industries and diversify into other asset classes for multiple streams of passive income.

2. Financial Predators

Don’t count on the government or police to rescue you from financial predators. The best protection against financial predators is financial literacy and to be less trusting of others in handling your money or who want your money “for an investment”. Financial predators are very skilled at trying to win over your trust. They may be your church members or community volunteers, anything to get you to drop your guard.

Always be in tune to “read people”. This is not being judgmental, it is sensing what is closer to reality (no one can comprehend full reality). Grasp verbal and non-verbal language. Verbal is more than the content of the spoken word. Often, how words are spoken communicates a truer message.

3. Protection from yourself

It is possible to make a quick fortune on one investment. We have all heard of how someone who put virtually all life savings in one investment and it paid off dearly. This story inspires greed. Rarely are results so fortuitous for others. It is more common for the results to be financially disastrous. Even if you were to win it big, chances are you will take another big gamble to try to repeat the experience but end up losing all the windfall profit you had gained. For an in depth knowledge on this subject, read Jason Zweig’s Your Money and Your Brain. This is the finest book on Behavioral Finance I have ever read.

Protect yourself from yourself with good judgment. Exercise discretion with logic, critical thinking, common sense, and experience,. Your thinking may be perfectly logical, but if only one premise is false, your conclusion will be false, too. Too many investors fail to question their premises. Use objective, critical thinking to evaluate the veracity of the premises. Without objective critical thinking, logic is useless. Whereas logic and critical thinking may be classified as “book smarts”, common sense and experience may be classified as “street smarts”. Common sense spares you time in not having to do unnecessary research, while experience teaches you to stay grounded.

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