Move over speed, efficiency, and optimization; resilience is the new sexy in business and personal finance. Who cares about maximizing profits and stocks for the long run when a pandemic is upon us? With today’s headlines screaming “U.S. Unemployment Rate Hits 14.7%, Worst Since Great Depression,” we’ll take just getting through the present moment.
Resilience is our capacity to bounce back from an adverse event or trauma. Metallurgists use the term to define the resistance of a metal to a shock. Ecologists refer to “resilience time” with ecosystems as how long it takes them to return to their original state after a disturbance. In economics, resilience is the ability to begin growing again after a recession.
In dealing with personal adversity, having a positive outlook is supposedly the most important predictor of resilience. However, as Diane Coutu noted, writing in the spring after the September 11th terrorist attacks, resilience requires more than optimism, and “[i]n extremely adverse situations, rose-colored thinking can actually spell disaster.” (How Resilience Works, Harvard Business Review, May 2002).
Coutu recounted her conversation with author Jim Collins (“Good to Great”) about his research into the characteristics of resilient companies:
[Collins] had a hunch (an exactly wrong hunch) that resilient companies were filled with optimistic people. He tried out that idea on Admiral Jim Stockdale, who was held prisoner and tortured by the Vietcong for eight years.
Collins recalls: “I asked Stockdale: ‘Who didn’t make it out of the camps?’ And he said, ‘Oh, that’s easy. It was the optimists. They were the ones who said we were going to be out by Christmas. And then they said we’d be out by Easter and then out by Fourth of July and out by Thanksgiving, and then it was Christmas again.’ Then Stockdale turned to me and said, ‘You know, I think they all died of broken hearts.’”
Stockdale survived by using a balance of realism and optimism. He explained, "You must never confuse faith that you will prevail in the end — which you can never afford to lose — with the discipline to confront the most brutal facts of your current reality, whatever they might be." (Stockdale Paradox: Why confronting reality is vital to success)
In personal finance, resilience is the ability to withstand adverse events that affect our income or assets. Some events are personal - a job loss, divorce, or health event. Others affect everyone - a natural catastrophe, terrorist attack, or, as now, a pandemic.
Ensuring your finances are resilient often comes down to hedging your bets during the good times in order to stay prepared for the bad times. The recipe is straightforward:
Spend less than you make and keep your eye on cash flow.
Maintain emergency cash reserves.
Diversify your investments.
Purchase adequate insurance.
Spell out your wishes in an estate plan.
The rub lies in execution.
Hedging your bets involves costs, either out-of-pocket costs for things like life and disability insurance premiums, or opportunity costs from, say, holding low-earning bonds while stock prices are soaring.
During the good times, with the focus on potential upside, these costs can be difficult for many people to bear. But for the insurance premium, you could take a nice vacation. Cash reserves could be “put to work” earning investment returns in the market, rather than lying fallow in a bank account.
Staying vigilant with preparedness is also a challenge. During the early 1990’s, while living in Los Angeles, I prided myself on staying prepared for earthquakes with extra cash on hand, which I kept stuffed in an envelope deep inside a drawer. Over time, I began using the envelope as my supplemental ATM, withdrawing some money for a night out with the intention of replacing it later. Somewhere along the line, the system broke down and on the morning of the 1994 Northridge earthquake, I found exactly zero dollars in the envelope when I went to retrieve the money.
Even if we’re willing to bear the costs and maintain the discipline with our financial preparedness, we can’t prepare for everything. In mid-February, while researching some investment questions, I came across a promising paper titled “Crisis Investing: How to Maximize Returns During Market Panics.” The authors acquitted themselves well, noting in the preface that
We have spent the past year studying every financial crisis in the US since 1970. We have done this work for your benefit, so that you will keep your head when all about you are losing theirs. When weak hands fold, when forced sellers liquidate, we hope this research will help you make good decisions.
Unfortunately, none of the previous crises they studied involved a global pandemic. The timing of publication was ironic, given the February 10th publication date. Though we didn’t know it at the time, the Covid-19 virus had already been circulating around the world for several weeks and was about to make its terrible presence known far outside China.
It’s times like now when we need resilience most. For those who accepted the costs and maintained vigilance during the good times with their financial preparedness, they’re reaping the benefits and are likely in as good a position as possible to weather this latest storm. They can afford to be optimistic.