5 Financial Planning lessons from Antifragile

5 Financial Planning lessons from AntifragileOn Sunday afternoon I finished reading an excellent book, Antifragile by Nassim Nicholas Taleb.

The author is an essayist, scholar, statistician, and risk analyst, possibly best known for his 2007 book The Black Swan.

I started reading The Black Swan when it was published and have to admit I really struggled with it. Taleb is clearly a very intelligent individual, but I had trouble back then staying focused on his narrative style which he mixes with short philosophical tales, and historical and scientific commentary.

This time, I was determined to persevere and read Antifragile from cover to cover, as the summary suggested there were many parallels to be drawn with Financial Planning and investing.

Antifragile: Things that Gain from Disorder is introduced as follows:

“Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better”.

So after reading Antifragile, what were the five most important Financial Planning lessons I picked up from the book?

“Fragility is quite measurable, risk not so at all, particularly risk associated with rare events.”

As Financial Planners, we often spend a lot of time talking to our clients about ‘risk’.

When investing, your attitude towards investment risk is an important consideration; how much risk do you want to take with your portfolio in order to get the returns you want?

Something not enough investors consider is fragility, which I take to mean here as capacity for risk.

Regardless of how much investment risk you are prepared to take with your money, it’s always more important to think about how much investment risk you are able to take.

Perhaps we should rename ‘risk capacity’ to ‘investment fragility’?

“Yet simplicity has been difficult to implement in modern life because it is against the spirit of a certain brand of people who seek sophistication so they can justify their profession.”

We see this time and time again in retail financial services.

What should (and can) be relatively simple is often made complex because it can serve some elements of the financial services industry commercially to dish up complexity.

The best Financial Plans we see are incredibly simple. A simple Financial Plan is likely to be more effective, and certainly easier to stick to, than one filled with complexity.

When it comes to tax planning, simplicity has a big advantage of complexity as it is less likely to be challenged by the authorities on legal or ethical grounds.

“They take the worst historical recession, the worst war, the worst historical move in interest rates, or the worst point in unemployment as an exact estimate for the worst future outcome. But they never notice the following inconsistency: this so-called worst-case event, when it happened, exceeded the worst case at the time.”

I highlighted this passage when reading Antifragile on my Kindle because it illustrates such as important point.

If you model your Financial Plan based on the worst thing that has previously happened, what is to stop the next worse thing to actually happen from being far worse?

When we construct Financial Plans for our clients, we often model disaster scenarios. These are not based on the worst-case event from history, but the worst-case event as it would impact the client.

Don’t focus on the worst-case event from history, but instead the worst-case event as it applies to your own Financial Planning.

“The longer one goes without a market trauma, the worse the damage when commotion occurs.”

This is important for all investors to understand. Markets move in cycles; crashes tend to follow periods of sustained growth.

The longer the time an investment market goes without a traumatic crash, the greater the extent of that crash when it inevitably happens.

“Noise is what you are supposed to ignore, signal what you need to heed.”

Taleb included some important thoughts about noise and signals in this book.

He talked about an example where the signal to noise ratio is about one to one, so half noise and half signal. This means that about half the changes are real improvements or degradations, but the other half result from randomness.

This 50/50 signal to noise ratio is the result of yearly observations. On a daily basis, the composition changes to 95% noise and only 5% signal.

Observing data on an hour basis turns it into 99.5% noise and 0.5% signal.

When reviewing your own investment portfolio and Financial Planning, consider how much of what you are reviewing is noise (unimportant) and how much is signal.


Have you read Antifragile? Has it changed how you think about Financial Planning and investing?



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About Martin Bamford

Martin Bamford is a Chartered Financial Planner, Certified Financial Planner (CFP) professional and published personal finance author. He works with elderly clients to provide advice on funding residential care fees, hosts the Informed Choice Podcast and is a keen ultra runner.
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