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Friday, 29 March 2013

Learn from the mistakes of others

There is a german word "schadenfreude" (meaning 'pleasure derived from the misfortune of others') which is sometimes used in English, as we have no equivalent term. Although there's no pleasure to be derived from sad tales such as this, we should be able to learn a lesson from such tales of woe (perhaps this is 'schadenwissen' ?):

1. Don't believe your 'friend' the bank-manager when he tells you that everything is alright. If you were worried enough to go talk to him, you should at least put some concrete risk mitigation strategies in place while you're there, for example

2. Diversification applies to ALL forms of investment. So keep your savings in several different banks, as well as a mix of at-call, term deposit and other 'cash' investments, not all with one particular institution. It may be the one that 'goes broke', or it may be the the one that the government doesn't bail out...

3. Point 2 has to be tempered by a consideration of cost and convenience. Keeping some of my cash in an overseas bank might make sense (eg. in the unlikely event that Australia was invaded, or all Aussie banks nationalised etc.), but putting some in an Irish bank, some in a Nigerian bank, some in a Canadian bank etc. would be expensive, time consuming, and confusing.

When considering risks, it is tempting to completely ignore low-probability events that would have a large impact if they were to happen. In reality, every risk should be ranked according to its likelihood X its potential impact - so some thought should be given to events that are unlikely but would be devestating if they occured. Fortunately, there is often a simple way to mitigate against such events.

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