Live your life, but plan for 'tail events'

By Rob Schulz

Mansfield Record

Do you know what a tail event is? If you don't, think about winter storm Uri. The snowmageddon event we just lived through here in North Texas was a tail event. In his book The Black Swan, Nicholas Talib calls them black swans, extreme circumstances that occur every 100 years or so.

I don't know about you, but it seems like every time we turn around, we're getting whacked by a tail event: storms, pandemics, market volatility….you name it. Why do we call it a tail event? When you graph probabilities of outcome on a graph, you get a bell curve distributed around a mean with "tails" that reach out on both sides. Statistically, you are in the bell curve's thin part when you get out three standard deviations from the median. The probability of occurrence becomes highly unlikely.

Let's always remember that highly unlikely does not mean never. As humans living in a world where the future is uncertain, we must consider tail events and plan for them. This gets tricky because if all we are to do is plan for unlikely events, it limits our ability to succeed the other 99.7 percent of the time.

So what do we do? We plan for it. In the business world, it's called risk management. Risk managers identify risk and assess its magnitude and probability. From there, they either decide to manage the risk, purchase insurance to transfer the risk or make plans to avoid the risk altogether.

We can do the same thing in our personal lives. At renewal, always review your insurance policies carefully with your agent. It's not all about paying the cheapest premium. Make sure you have adequate coverage on your home and property. If you are a wage earner with a family relying on you, make sure you have life insurance too!

It's much easier to deal with the unexpected when you have savings. Keep at least three months of expenses, if not more, in a savings account so you can access it for emergencies. Also, think about other ways to be prepared for unlikely emergencies. For example, keep a first aid kit and blanket in your car or purchase a small generator for your home.

When making financial decisions, ask yourself what could go wrong. Some Texas homeowners found themselves facing sky-high electric rates this month because they decided to purchase their electricity at raw market rates through a utility called Griddy. Because of public outcry, these folks will probably see some relief, but don't expect to get bailed out every time something "unfair" happens to you. Always consider the downside when entering into contracts.

Can we predict when the next tail even will be? Absolutely not! By definition, tail events are unpredictable as to when they will occur or what they will be. One thing is for certain; our resilience has been tested. Recent experiences should instill confidence that we can handle tail events. But honestly, I'm hoping for more days in the 99.7 percent probability range.

Rob Schulz is a local Certified Financial Planner and author of “Thoughts on Things Financial: Your Guide to a Chaotic Money World.” He can be reached at rob.schulz@schulzwealth.com. Buy his book here: https://www.schulzwealth.com/book/

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