In August 2007 a bridge over the Mississippi River in Minneapolis collapsed. The bridge had supported heavy traffic for 40 years, but the additional weight of heavy construction vehicles caused the plates connecting the beams to the columns to tear. The combination of wear and tear, poor maintenance and additional weight led to the collapse. The top reason for bridge disasters is a mix of factors that, if they happened individually, would not cause a bridge to collapse. However, if they happen at once, they result in disaster.
This engineering example contains lessons for our own financial planning too.
For example, you may have factored in the impact of interest rate increases on your bond repayment schedule. You may think that you have enough savings or income to withstand even sharp interest rate increases. However, add losing your key client or a serious illness in your family to either of those and your financial future may be in jeopardy.
Often these seemingly uncorrelated factors are in fact linked. Sudden interest rate hikes can lead to business failures, which can, in turn, lead to property vacancies and job losses. Alternatively, when your business fails, you might succumb to a serious stress-related illness, which may impact your marriage and you end up facing divorce.
It is all connected.
Despite it being unlikely, in the rare event that it all happens at once, the coinciding risk factors can destroy a financial plan, and even a life. If we learnt anything from the pandemic it must be that the unthinkable can happen and many things can go wrong at once.
It doesn’t mean that we should avoid risk. But we must consider our options and the consequences of the worst case. What sacrifices would we be prepared to make? How much time will we have to get back on our feet? What will the impact on my family be? How do I mitigate against one of the risks so that I can withstand coinciding multiple risk events?
“It won’t happen,” is not a great strategy. “What if?” is better.
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//29 April 2022.