“Superficially, I think it looks like entrepreneurs have a high tolerance for risk. But, having said that, one of the most important phrases in my life is ‘protect the downside.’”
–Sir Richard Branson
When you adopt the success behaviors and characteristics in this section of “What the Successful Do,” you are more likely to reach your financial goals. However, it also turns out that the same approach reduces risks in your personal life. That, in turn, can lead to higher levels of happiness and fulfillment.
WHY PROTECTING YOUR DOWNSIDE MATTERS
The admonition to protect the downside is a phrase you see a lot in business literature. But it is not usually called out as a success behavior, or as a personal characteristic. As far as I know, My Money Highway is the only source that classifies protecting your downside as a success behavior and not a strategy.
You see, I noticed that, for some reason, many of the successful not only succeed with money issues but often with other life issues as well. For instance, successful people tend to live longer. And money and patience do correlate somewhat with higher levels of security and happiness.
But why? What is it about success behaviors that not only ensure financial success but also help insulate people from some of life’s other risks?
Well, the answer is complicated. First, we have to define the term.
PART 1: WHAT DOES “PROTECTING THE DOWNSIDE” MEAN, ANYWAY?
ONE NOTABLE EXAMPLE
Let’s use Sir Richard Branson, owner of Virgin as an example to illustrate the concept of protecting the downside in the business world.
At one point, he wanted to take Virgin Records, an established and thriving music and entertainment business, and expand it so that he could also operate a transatlantic airline.
Think about that. If I decided I wanted to take an existing hardware store and add a sideline where we served mixed drinks, you would think I was crazy (I’ll have a Mai Tai with my socket wrench please).
In some ways, this was the same kind of situation. After all, the two businesses could hardly be more different. But Branson was very aware of that. And he took several steps to adjust to the airline businesses’ reality.
So, to protect his downside, he started small, leased only one plane, and made sure that he could sever the lease on favorable terms if things did not work out.
Did his measured approach pay off? Yes. At this writing, Virgin Atlantic Airways has a market value north of five billion dollars and operates a fleet of 45 aircraft.
STRATEGIES TO PROTECT THE DOWNSIDE
To some people like Branson, protecting the downside can mean starting small and working their way up. As a rule, it means limiting risk.
There are a lot of ways to do that. For instance, here are some of the most common examples and actions that people take in the business world; they:
1. Do their research—they know their subject and investments very well.
2. Have a good handle on what can go wrong—they determine what the risks actually are.
3. Take actions to limit possible financial loss—“heads I win, tails I do not lose much.” (Parabai)
4. Limit the time, effort, and money to a new venture up front and move on quickly if it does not work.
In other words, these common-sense steps are akin to Charlie Munger’s advice to avoid doing anything stupid.
But how can a person use the same kind of mindset in their personal life, and what sort of actions can they take?
PART 2: HOW DOES THE ‘SUCCESS LIFESTYLE’ PROTECT YOUR PERSONAL DOWNSIDE?
PUTTING THE CONCEPT TO THE TEST
As I mentioned at the outset, I believe success behaviors automatically protect the downside of many of life’s personal risks. It is just difficult to prove it.
So, to test the idea that protecting the downside is a specific personal behavior and not just a strategy, I decided to compare success behaviors/characteristics with known significant life risks.
Most of the weightiest problems in life involve relationships and lifestyle. Major failures/disappointments can include:
- Divorce
- Spending problems
- Health issues
- Job failure (job loss)
Well, it turns out that those items are the four primary causes of personal bankruptcy too. Therefore we can draw some conclusions about the relationship between success behaviors and life risks.
DOWNSIDE PROTECTION NO 1: MAKE A STRONG EFFORT TO STAY HEALTHY
Medical bills are the leading cause of personal bankruptcy in the US, dwarfing all of the other categories put together. And surprisingly, a Harvard study showed that almost 80% of those declaring bankruptcy had some form of health insurance. Unexpected expenses can quickly drain any savings or insurance support people have—especially if a disease is chronic and/or expensive.
So, what do the successful do to protect their downside? Prevention. Here is the proof:
- 76% exercise 30 minutes or more each day
- 70% eat less than 300 junk food calories per day
- Virtually all avoid smoking (or other addictive activity). Those who smoke cut their net worth in half. Read it about it here.
All of these behaviors have another positive side effect: enhanced brain function. That means faster and better decisions, and more overall clarity of thought at work and at home.
And, as you may remember from a previous post, fitter people also make higher salaries. Personal appearance and health are also correlated with higher wages, which brings me to the second item on the list.
DOWNSIDE PROTECTION NO 2: TAKE ACTIONS TO STAY EMPLOYED
Job loss is the second leading cause of bankruptcy.
And again, think about success behaviors and characteristics. Here are just a few of the examples of what the successful do to remain employed:
- College education (85 percent have gone to college)
- Continuous learning at all ages to stay current
- Honesty (with some caveats)
- Hard work
- Grit/Determination
- Developing multiple diversified sources of income.
Again, the research of Tom Corely provides valuable insights also (see above too). According to his extensive study in Rich Habits, he notes that, in addition to everything else mentioned here, the successful are incredible networkers and spend an average of 5 hours per month networking within their industries. After a job loss, this can be the critical element to becoming reemployed, or in pursuing new opportunities.
DOWNSIDE PROTECTION NO 3: TAKE ACTIONS TO AVOID DIVORCE/HAVE POSITIVE RELATIONSHIPS
The third leading cause of personal bankruptcy is divorce.
And no, the successful do not have a magic wand to prevent divorce. And no, they are not necessarily less likely to divorce either. But success in managing finances is a positive factor, as there is a lot of research that indicates that money issues are the number one cause of friction in a marriage. So, it may be that having enough helps some relationships and prevents divorce in the first place.
There is a more fundamental reason as well. After all, what insulates the successful from going broke through a divorce when a breakup is inevitable? Well, money—having some in reserve. You see, many financial problems happen shortly after a divorce, not necessarily right at the time.
You see, marriage allows two people to pool resources and gain several economic advantages. When marriages dissolve those advantages dissolve too. One way to mitigate that risk for both partners is to have savings to cushion the financial blow.
The whole subject is complex. To find out more about money and couple dynamics read here.
DOWNSIDE PROTECTION NO 4: KNOW WHAT YOU SPEND, AND PREVENT OVERSPENDING
The fourth leading cause of personal bankruptcy is overspending.
And what is the cause of overspending? Well, just being aware that you are overspending tops the list. In other words, if you don’t pay attention to your money, you can get into trouble.
So, what do successful people do? They protect their downside by:
- Paying attention by tracking their net worth.
- Purchasing houses, which often work a bit like an enforced savings account that also “fix” housing expenses. They build up equity over time.
- Dedicating money to savings before using it on spending. Retirement savings rates are around 14-19% for that group.
CONCLUSION
Engaging in success behavior(s) is not a cure-all. But when you think about it, common sense tells you there is something important there.
Being healthy, staying employed, having a stable relationship with a spouse or significant other, and actually paying attention to what you spend is positive. For whatever it is worth, that covers most of the subjects in posts of “What the Successful Do” section of MMH–both directly and indirectly.
And it is hard to believe that this group of behaviors among the successful is a coincidence. Taken together, they protect the downside of life risks to those who practice them, and their families too.
Nonetheless, some of this careful, measured behavior seems to run counter to what you might think of in successful entrepreneurs.
I like to think of risk-takers, making inventions in their garage, working incredible hours (sometimes until they come close to ruining their health), and risking it all for their dream. I admire that kind of commitment. But that view of entrepreneurship sells some pretty basic success strategies short and does not conform to reality.
So, take Sir Richard Branson’s advice.
(Author’s note: Branson practices what he preaches, and not just on the business side. His marriage has been enduring, he exercises an hour per day, and I suspect he is still careful with his money).
SUMMARY
1. Protect your downside in your personal life, not just your business life. To do that, adopt success behaviors.
ACTION PLAN
1. Put together and implement a plan to improve your health.
2. Look over Section 2 (above) and see which actions you have taken, and which remain undone. Fill in any gaps.
3. Take the time to know what you spend and on what. Put together a plan and review it frequently.
4. Work on personal relationships. Failure costs both heartache and money.
Disclaimer: consult with a financial professional before taking any steps outlined here. Not all advice is suitable for your circumstances or investment style.
Photo attribution: Kevin T: Wonderland walker
© 2019
Great work as always!
The indirect benefits of certain behaviors are often overlooked. The impact is gigantic. Hopefully, this post will educate others so they can lead happier more fulfilling lives.