What can we do to prepare if the Russian-Ukraine war gets even worse?
Topics covered include:
- How risk and uncertainty differ as does how we manage them
- What we can learn from Ukraine and Russian citizens on dealing with uncertainty
- What will be the financial impact of the sanctions against Russia and the ruble collapse
- Why and how we should all prepare for potential cyberattacks
- Why now is the time to make sure you have an appropriate asset allocation
- How holding dollars, euros or stablecoin can help protect against currency collapses
- What we can do to help Ukraine
Show Notes
JPMorgan Says Selling Stocks Now Carries Too Much Risk by Nikos Chrysoloras—Bloomberg
Ukraine conflict: Dread in Kyiv as huge Russian convoy advances by Lyse Doucet—BBC
How new sanctions could cripple Russia’s economy—The Economist
Russian c.bank orders block on foreign clients’ bids to sell Russian securities – document—Reuters
‘Yes, He Would’: Fiona Hill on Putin and Nukes by Maura Reynolds—Politico
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Transcript
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 377. It’s titled, What If It’s Different This Time?
In last week’s podcast episode, and also in the most recent episode of Money For the Rest of Us Plus, I shared some statistics, how six months after a major military campaign or terrorist event, the stock market on average has rebounded, the economy has rebounded, and oil prices have stabilized or fallen.
Risk versus Uncertainty
The head of global equity strategy at JPMorgan Chase, Mislav Matejka, said something along the same lines of, “If one is sailing on the back of the latest geopolitical developments now, the risk is of getting whipsawed. Historically, the vast majority of military conflicts, especially if localized, did not tend to hurt investor confidence for too long, and would end up as buying opportunities.”
Yet, I am acutely aware and have emphasized on the show that we are not guaranteed the average outcome. We only get one life, one return stream, one pattern of annual stock market, and bond returns. We get one series of geopolitical events. We pass through time. We don’t get to run a simulation of a bunch of different scenarios, and then choose one or take the average. We get one shot. And those averages, be it the average stock market return, the average return of different assets under different scenarios—those averages include extreme events, tail events, which are rare occurrences, well outside of the norm. But if you have a scenario where you have a lot of extreme events, fat tails, that actually can skew the average.
Tail risk, which is distinct from tail events—tail events are things that occur. Tail risk is the personal harm caused by these tail events. In the worst case, tail risk can ruin us; we could die, we could go bankrupt, our country could be invaded. Tail events and tail risks are based on probabilities, statistics, where there’s a defined range of potential outcomes, and the odds can be estimated. Much of life can be defined or framed by probabilities. How likely is some event to occur? Will our house burn down? What’s our average life expectancy? That’s different if something is uncertain.
When something is uncertain, we don’t know what could happen, and we don’t know the odds of what will happen. We just don’t know. The uncertainties are open-ended, with many possibilities.
One easy way to distinguish between risks and uncertainties is, risk—you can buy insurance. I have recently repriced our home insurance and auto insurance. The insurance company could come up with a rate for me. We use Policygenius to do that. But uncertainties, where we don’t know what we don’t know, we’re not sure what exactly could happen, how things will play out—those really can’t be insured against. We have to follow the precautionary principle, which is in the face of extreme uncertainty, we take preventive action. We did that during the pandemic when we didn’t know how bad COVID-19 was, how it spread, how severe cases would be; we sheltered in place, we closed the economy.
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