Avoiding the Zeros: How to Protect Your Wealth from Financial Ruin

One very important concept in both our health and money is avoiding the zeros, which we talked about last week on our Wealth Wednesday call.

What exactly is a zero? A zero is something you can’t easily come back from – in the case of health, this would be death (which at least for now we cannot come back from), and in money this would be having zero dollars, which can be financial ruin.

So when we’re thinking about what risks we’re taking in life, we first want to prioritize avoiding those zeros. Maybe you’re interested in skydiving, so you purchase some equipment and jump out of a plane on your first dive without any idea how to use it. THIS IS BAD. Way too much risk of a zero!

And you may say, “Oh that’s silly, no one would ever do that.” But this actually happens all of the time. People smoke for years, they drink and drive, eat heart attack diets, etc. Even the recent Prime Air airplane crash was an example of making a “zero bet” – the pilots had the option to go around, spending another 30 minutes in the air and delaying their schedule, or take the bet that they could get the plane down safely. They lost that bet, and five people ended up getting killed.

The same “zero bet” situations can happen with our money if we have too much of our money invested in one thing. Even the general math of losses is painful – if you lose 50% of your money, you have to make a 100% return on your remaining money to make back your losses. And if you lose 90%, you have to make a 900% return on your remaining 10% to get back to where you were.

But the real kicker is when you lose everything and end up with zero, since zero multiplied by anything is still zero. <sad trombone>

And again, you might be saying, “Well, no one would ever do this!”. And again, it’s actually pretty common. Caitlin and I see this most often with investments in real estate, private equity, and employer stock.

We’ve had clients come to us with their $100,000 in savings that they’ve spent years building up, ready to dump it all into one real estate syndication deal that could easily go bust. We’ve had clients who wanted to contribute their entire life savings to help open a friend’s new business or restaurant. We’ve also seen clients with their entire portfolio in one company’s stock because they’ve spent their entire career there and never diversified.

People don’t think of these situations as risky, but it can be equivalent to jumping out of a plane without knowing how to use the parachute.

So the takeaway here is to think about the level of risk you are taking, and hopefully avoid the zeros. Maybe you only want to invest 10% of your savings in that risky real estate deal, or keep just 50% of your portfolio in your company stock. And maybe throw your least favorite person out of the plane first to make sure that the parachute is working. (Just kidding! Caitlin says for liability reasons I cannot actually suggest that last one.)

Here’s to a long, healthy, and wealthy life with no zeros!