How to protect your life from shocks like Coronavirus (Part 1)
/On March 27th 2020, in the middle of the global COVID-19 pandemic, I wrote a brief post, in which I said that part of the reason so many people are collapsing in the middle of the crisis is that they lead “fragile lives”.
We have to understand a harsh reality of life:
Shocks will happen. Shocks have always happened.
Shocks happen in the world of finance (e.g. 2008 Global Financial Crisis).
Shocks happen in the world of health (e.g. catching cancer, heart disease…).
Shocks happen in the world of personal finance (e.g. Lebanese banking sector crashes and you lose your life savings).
Shocks happen in the world of relationships (e.g. a spouse cheats or decides to leave).
Shocks happen in nature (e.g. earthquakes, tsunamis, hurricanes).
Shocks happen in your career (e.g. you unexpectedly lose your job while thousands deep in credit card debt).
These are just examples - there are many such shocks in the “real world”.
These types of shocks are called “HILP”: High Impact, Low Probability events.
A “HILP” event is an event that has 2 characteristics:
The probability of the event actually happening is very low; but
The impact of the event (if it happens) is high.
For example: jumping from the top of Burj Khalifa with a parachute.
The probability of your parachute failing to open is low (let’s say 1%);
But the impact (pun intended) if it does fail is high: I’ll let you picture it…
That is a “HILP” event.
There are hundreds of examples of “HILPs”.
In fact, all of the examples of “shocks” I listed at the top of this article are “HILP”: their probability is low, but their impact is high.
This is something that the most successful investors (including the firm I used to work for 2008-2012) understand very well:
Yes the probability of a full collapse of world markets is low, but if it does happen, it can result in massive losses and potential bankruptcy.
So they put plans in place to protect the company and the investment portfolio IF this “low probability” event actually happens.
This is why they didn’t suffer big losses in the big crash of 2008, and why they didn’t suffer big losses in the big crash of March 2020.
I learned those lessons 10 years ago while working with this firm, and I did a ton of research on how this principle can be applied in ALL aspects of life. I was further inspired by the book Antifragile by Nassim Taleb.
As I mentioned at the beginning of this article: ALL aspects of our lives can suffer shocks with MASSIVE consequences.
So just like this investment firm hedges (protects) its investment portfolio from “HILP”: we individuals can protect our lives from “HILP” as well.
In Part 2 of this article, I will talk about “how”: the methods I researched and developed over the past 10 years to protect myself and my family from “HILP”.
For now, you should know that you should protect yourself from “HILP” in a number of areas, including:
Personal finance: how well can your finances survive a big shock?
Your physical fitness: what do you do if there is a fire and you need to carry a loved one down the stairs for 30 floors? Or, what do you do if you’re having a picnic with your friends and you fall into a fast moving river? Are you able to pull a big man from a burning car?
What do you do if you get chased by a rabid dog?
Your health: what do you do if you get hit by a disease are you’re no longer able to work?
I combine all of those into 2 buckets: “personal life” and “financial life”, and I’ll talk about how to protect both from “HILP” in Part 2.
