If you’re still looking for a gift for someone special this holiday season, may I suggest Nassim Taleb’s book “Antifragile”. I know it might sound a bit corny, but reading this book would be a great way to start the new year. It was first published 10 years ago, but the madness of recent years has only made Taleb’s ideas more relevant. In fact, the notion of antifragility is perhaps one of the most salient ideas in personal financial planning today.
While most people have an intuitive sense of what is fragile and what is not, Taleb asks us to go further and consider the exact opposite of fragile. Some might say the opposite of fragile is “robust” or “resilient,” but Taleb disputes that. For him, terms like robust and resilient mark the middle of the fragility spectrum. These are neutral grounds. According to Taleb, the opposite of fragile is anti-fragile. Fragile objects are damaged by stress; robust objects are not disturbed by stress; but antifragile items are enhanced by stress.
Examples of antifragile are more common than initially thought. Taleb explains that our bodies are antifragile in many ways and within certain limits. An athlete becomes stronger by applying stress to the body in certain ways (i.e. through weightlifting or cardio conditioning). In response to a virus or vaccine, our body produces antibodies to prevent future infection. In both examples, our bodies strengthen themselves through the stress they experience.
The quality of fragility/antifragility extends far beyond our physiology. In fact, some of the most important fragilities and anti-fragilities 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 cite several examples where small companies armed with 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, although large and complex, is antifragile because it is the product of many independent actors, each seeking to accomplish its goal while responding to shocks and opportunities that arise. In the process, some people will fail, but others will learn from their failures and the overall system will adapt and improve.
On a more personal level, the decisions individuals make on a day-to-day basis largely determine their degree of frailty or anti-frailty. This powerful idea has direct application to financial planning. For example, at a very simple level, saving more money moves you towards the antifragile end of the frailty spectrum, while borrowing more money moves you towards the fragile end. The more money you borrow, the more fragile you become. Many overwhelmed homeowners discovered this painful reality in the aftermath of the 2008 financial crisis. Falling property prices and rising unemployment resulted in many people losing their homes. On the other hand, antifragile people (meaning those who were not too much in debt and had cash), found incredible deals among all these foreclosed properties.
Individuals can also manage the fragility of their investment portfolios. For example, a portfolio heavily concentrated in poor quality assets is extremely fragile. Such a portfolio may perform 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 reduce portfolio fragility by increasing asset quality and portfolio diversification. By including the appropriate amount of fixed income securities in your portfolio, you can further reduce portfolio fragility. If you include enough fixed income securities in your portfolio to meet your projected portfolio withdrawals for the next five years, you will make your portfolio resilient. However, by combining this resilient allocation with strong 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 in line with your original target weights.) The Rebalancing Process period effectively leads you to sell assets when prices are high. and buy other assets when their prices are low. Hmm… Buy low and sell high. That sounds good.
Steven C. Merrell is a partner at Monterey Private Wealth Inc., an independent wealth management firm in Monterey. He welcomes your questions regarding investments, taxes, retirement or estate planning. Send questions to Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.
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