Rust never sleeps

I am an unashamed fan of much of Seth Godin's work.  In a blog post a couple of days back, he presented a graphic to show the relative danger of generating electricity by a variety of means.  The info was probably an eye-popper to people attempting to imagine the impact of the Japanese nuclear power disaster currently underway.

While Seth uses the example to highlight the impact of long-term marketing, I take it as yet another example of the disconnect between human perception of risk, and the risks we actually face.

In the energy graphic, we routinely discount the thousands upon thousands of deaths linked over time to the use of coal and oil to generate electricity.  That is because (the occasional mine collapse or oil rig explosion notwithstanding) these deaths occur in private, one at a time, slowly, and without fanfare.  Thank you, black lung.

In the same fashion, we discount the things that really kill most of us: heart disease, cancer, suicide.  All things that creep up on us slowly, one day at a time, without fanfare or marketing.  Despite the Neil Young lyric, we are all more likely to rust than to burn out.

Financially persons often worry about the idea that something spectacular and devastating can happen.   In purely financial terms, these things can be dealt with through insurance.  Is your family depending on your ability to earn a living?  Well, you better protect against that loss either through your premature death or disability.

The reasons those things are easy to insure against at a fairly reasonable cost is that they are quite rare.  The insurance industry knows this, and does the math quite well.   It looks something like this:

(Avg Premium Charged x Persons Covered)  >> (Persons Who Actually Die/Become Disabled x Benefits Paid)

But what really undoes people is not the rare and spectacular, it is the common and the perfunctory.

Any investment plan begins with a surplus cash flow.  If you do not have that, stop all other plans until you do.   The second thing any investment plan needs is to exceed the creep of inflation that devalues your liquid wealth every day, quietly, without fanfare.

The market going down 30% is spectacular and scary.  Inflation of 3% per year will not raise your eyebrow, but both can make you just as poor if not handled properly.