If you are still looking for a gift for someone special this holiday season, may I suggest Nassim Taleb’s book Antifragile. I know it may seem a little nerdy, but reading this book would be a great way to start the New Year. It was first published ten years ago, but the craziness of the past few years has only made Taleb’s ideas more relevant. In fact, the notion of antifragility may be one of today’s most salient ideas in personal financial planning.
While most people have an intuitive sense of what is fragile and what is not, Taleb asks us to take it a step further and consider the exact opposite of fragile. Some might say the opposite of fragile is “robust” or “resilient”, but Taleb disputes that. To him, terms like robust and resilient mark the midpoint on the fragility spectrum. They are neutral ground. According to Taleb, the opposite of fragile is anti-fragile. Fragile items are damaged by stress; robust items are unperturbed by stress; but antifragile items are improved by stress.
Examples of the antifragile are more common than we might initially think. Taleb explains that our bodies are antifragile in many ways and within certain limits. An athlete grows stronger by applying stress to the body in certain ways (i.e., through weight lifting or cardio conditioning). In response to a virus or a vaccine, our bodies produce antibodies to prevent future infection. In both examples, our bodies grow stronger by the stress they experience.
The quality of fragility/antifragility extends well beyond our physiology. In fact, some of the most significant fragilities and antifragilities are found in the way systems and organizations are structured. Large, complex, centrally-planned organizations are almost always fragile because they are designed to maintain the status quo. I’m sure you could name several examples where small companies armed with a disruptive technology have displaced established monoliths. The story of David and Goliath is not ancient history.
On the other hand, a system like a free market economy, though large and complex, is antifragile because it is the product of many independent actors, each seeking to accomplish his or her purpose while responding to the shocks and opportunities that present themselves. In the process, some individuals will fail, but others learn from the failures and the overall system adapts and improves.
At a more personal level, the decisions individuals make day-by-day largely determine the degree to which they are fragile or antifragile. This powerful idea has direct application to financial planning. For example, at a very simple level, saving more money moves you toward the antifragile end of the fragility spectrum while borrowing more money moves you toward the fragile end. The more money you borrow, the more fragile you become. Many overextended homeowners discovered this painful reality in the aftermath of the 2008 financial crisis. Falling home prices and rising unemployment caused many to lose their homes. On the other hand, antifragile individuals (i.e., those who were not overextended with debt and had ready cash on hand), found tremendous deals among all those foreclosed properties.
Individuals can also manage the fragility of their investment portfolios. For example, a portfolio that is highly concentrated in poor quality assets is extremely fragile. Such a portfolio may do well when the market is hot, but it will disintegrate when the market turns. Many crypto investors have learned this lesson the hard way over the past few months. Sometimes, being fragile hurts.
You can decrease portfolio fragility by increasing asset quality and portfolio diversification. By including the proper amount of fixed income in your portfolio, you can reduce portfolio fragility even further. If you include enough fixed income in your portfolio to meet your anticipated portfolio withdrawals for next 5 years, you will make your portfolio resilient. However, as you combine this resilient allocation with a sound rebalancing discipline, you begin to make your portfolio antifragile. (Portfolio rebalancing refers to the process of selling asset classes that have appreciated and buying assets that have lagged to bring your portfolio weights into alignment with your original target weights.) The process of periodically rebalancing effectively leads you to sell assets when the prices are high and buy other assets when their prices are low. Hmm…Buy low and sell high. That has a nice ring to it.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to: smerrell@montereypw.com