I recently watched all of the movies in the Hunger Games series (admittedly becoming a bit jaded after the second installment). President Snow was the elegant and soft-spoken leader of Panem, a fictional country overrun by poverty. He was reviled by his subjects because his actions were often vicious and oppressive. President Snow administered the Hunger Games, where the districts under his control would each choose two representatives to participate in an annual televised death match.
Prior to competition, President Snow would utter the phrase “May the Odds Be Ever in Your Favor” to each of the participants. Viewers and critics alike viewed this statement as feeble reassurance to the game’s competitors in the face of an almost certain demise. As a financial advisor watching these movies, it dawned on me what President Snow may have actually meant. I believe he was encouraging thoughtful personal financial planning decisions.
Nothing is certain in the world of personal finance. One can only hope that they give themselves the best odds of succeeding. Put another way, it is important to consider how every financial decision maximizes your future optionality or flexibility. One can make financial decisions that significantly hinder their future flexibility and these decisions may end up working out in the short term. However, if similar decisions are repeated over and over, chances are that the results will be negative long-term. As President Snow’s pal, Dirty Harry, would always say “Are you feeling lucky, punk?”
Having an inadequate cash reserve is one of the most common ways to put the odds against you. There is no plan in the case of an unexpected emergency or an economic downturn. You could always access your longer-term assets, but these may be in an IRA account that is punitive to tap. Alternatively, non-IRA assets may be more accessible, but you risk that your investments have experienced losses at the exact time you need the money. More often than not, the cash reserve is needed most during an economic downturn. Unfortunately, downturns are often concurrent with or immediately follow poor performance from the stock market.
Another common risk is overinvestment in real estate. I realize that real estate has long been a successful investment for many folks. Many of you hold multiple properties and enjoy huge success as real estate owners, as real estate investors and as landlords. Real estate can be a very good investment, but it is an illiquid one with the potential to place heavy demands on your cash flow. This is because maintenance, utilities, wear and tear, debt service, property taxes and possibly assessments can become costly over time. Furthermore, the sale of a property to alleviate a cash crunch is not always possible if market conditions are unfavorable. Even President Snow can trace his demise to the overexpansion of his real estate portfolio. If he had stuck with just a couple of castles instead of trying to capture real estate across the entire country, he probably would’ve survived as a ruthless dictator.
In the world of Texas Hold’em poker, the number of cards from the dealer that can create a winning hand for you are called “outs.” The greater your number of outs, the better your odds of winning the hand. The fewer outs you have, the lower your odds. If you place a large bet on your hand even when there are few “outs” in the deck, you can win big sometimes. However, if this strategy is repeated over and over, you will lose long-term because you are not properly playing the odds.
In financial planning, you need to create as many “outs” for yourself as possible. The argument that you made the right decision because it happened to work out once or twice is insufficient. President Snow was depicted as an evil character in the Hunger Games. However, in his subtle and soft-spoken way, he was also looking out for everyone’s financial long-term interests.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.