We recently posted a short primer on HEDGING and the possible financial implications created by trying to mitigate risks. We now add to our BLOG on HEDGING with a different perspective focused not on finances per se, but on the perceptions and emotions while confronting the uncertainty. Is the situation a problem or merely an inconvenience? Carefully consider your unique situation before hedging. This latter perspective reflects the Yin-Yang focus of #Yourtotalwealth.
IF YOU BREAK YOUR NECK, IF YOU HAVE NOTHING TO EAT, IF YOUR HOUSE IS ON FIRE, THEN YOU GOT A PROBLEM. EVERYTHING ELSE IS INCONVENIENCE. — Robert Fulghum
This is an indisputable fact in creating Your Total Wealth: you will be constantly assessing risks and considering options for controlling it or compensating for a potential loss.
Whether assessing the risks of an investment or the risks of managing your personal life, you are asking a fundamental question: What can I do to make sure I don’t lose what is important to me? Or if I must lose, what can I do to make sure I don’t lose too much?
What we do to control a potential loss is an example of hedging. That is why we are cautious when driving a car, buying health insurance, checking food ingredients (especially if we have allergies) or buying a smoke detector for the house.
Prudence, emotional maturity and foresight wouldn’t have it any other way.
But Fulghum’s perspective on “problem” versus “inconvenience” raises an intriguing issue. He is telling us that we might find ourselves investing too much time, money and energy in covering a loss that really isn’t a problem – just an inconvenience.
For example, the 2020 coronavirus pandemic saw some consumers load up on toilet paper and spaghetti to hedge their bets about a shortage, while others saw that behavior as irrational hoarding. The former saw an emergency for which they prepared. The latter thought they were making the problem worse by acting irrationally.
Problem or inconvenience? Rational response or irrational response? Hedging a risk or simply overreacting?
Both the Fulghum quote, and the question it poses, cut to the core of assessing risk and planning for potential loss. If you are confronted with a problem that could create a loss, consider options for covering that loss.
But if you are dealing with an inconvenience, buckle up, smile, and say, “This too shall pass.”