Years ago I went to Ireland with a friend. We rented a car and drove from Galway to Kilkenny via the southwest peninsular route. Ireland is awash with beautiful landscapes and scenic drives lined with intricately built stone walls. The roads, however, can be narrow and tricky to navigate at times.
One morning in a town called Lisdoonvarna (home of one of Europe’s largest matchmaking festivals), we woke up to a flat tire due to a slow leak overnight. A flat was no match for two thirty-year-old DIYers. Changing a tire is one of those skills everyone should learn at a young age, like balancing a checkbook. We switched out the bad one, put on the full-size spare, and were on our way.
A few days later, we were driving along the route from Dingle to Waterville on the Kerry peninsula, when our tiny car came face-to-face with a fallen stone from a roadside wall. The dark gray rock was about the size of a cantaloupe, but not so smooth. It was smack dabbed in the middle of our narrow lane. Thinking it was too big to run straight over, my friend swerved dangerously close to the stone wall to try to avoid it, only to hit it directly with our front right tire. We heard and felt a loud thump and knew we had to pull over. This time it was no slow leak, the tire had a significant puncture. Two of our five tires were now flat; we were stuck.
We took the first flat out of the trunk and hoisted our thumbs to find a ride. In no time, we had a ride to the next town, just ten minutes ahead. As luck would have it, there was a sign for a tire shop as we entered the town.
At the shop, an older man and a young apprentice greeted us with smiles.
The original flat tire had a small nail hole and could be easily fixed. That tire would likely last for the final three days of our trip. But what about the punctured spare? While the apprentice fixed the first tire, we talked it over with the older man.
What does a rental insurance policy cover? If we turned the car in and told them about the other flat, how much might they charge us? Maybe they wouldn’t even check for the flat spare if we returned the car and didn’t mention it. What if we didn’t fix it and got another flat in the next few days? We’d be stuck again.
The old man suggested a fix for the punctured tire. They could put an inner tube inside and fill that up making the spare driveable again. At a cost of only about $20 US, it seemed like a good option rather than to buy a new one. But we were on a tight budget, and in a hurry to get back on the road so we could make it to Killarney for the night. We weren’t keen on the idea of returning to the car, changing the tire and coming back to the shop again to spend more money to fix the punctured tire.
As the apprentice finished up, the older man had to leave. He drove a car out of the garage, then stopped and lowered the window. With a crooked grin, he said, “A penny smart, lads, a pound foolish.”
We hitchhiked back to the car, then switched the tires and returned to the shop. Good fortune had led us to the friendliest tire shop in all of Ireland, so we knew the right move was to follow the old man’s advice and spend the money and extra time necessary to get the second tire fixed.
Personal Risk Management
The term risk management can be applied to many facets of life. It can be as simple as having an emergency fund, bringing spare pants in the diaper bag when your kid is sick, rock climbing with ropes, or putting a net under a trapeze apparatus. It’s prudent to take precautionary steps that might cost more time or money, but when the shit hits the fan, you’re prepared and the damage is limited.
The wise old man in the tire shop had a funny way of saying it, but it’s the same principle. Might as well get the tire fixed now lads, or you may pay dearly later on when you return the car. We didn’t know the cost of returning a rental car with a punctured spare. But we did know the cost to fix it at the shop and it was relatively low. Moreover, had we not fixed it, we ran the risk of getting another flat in a more remote place before the trip’s end.
Hedging and Diversification
You hear a lot about risk management on Wall Street and on business television.
Oops, we should have practiced better risk management” – Somebody at Lehman Brothers, 2008
Risk management in the business world generally refers to assessing and mitigating risk from a company or institutional perspective. A classic example is the airline industry. Companies hedge the risk of large fluctuations in fuel prices by buying futures contracts on fuel. If the price of fuel goes down, they only lose the cost of the futures contract. If the price goes up, they’ve effectively lessened the expense. This small cost helps to make future prices more predictable, leading to steadier cost estimates.
In stock trading, hedging strategies such as stop loss orders and put options are used to lower downside risk. If the market or a stock suffers a large decrease, a stop loss order triggers a sell at a fixed price. Put options give a trader the option to sell at the strike price. So if the stock trades well below the strike, the trader doesn’t lose his/her shirt. Again, there’s a small cost to this strategy which offsets potential gains. But active traders rely heavily on these tools to limit losses.
One risk management strategy all individual investors should practice, especially dividend growth and P2P lending investors, is diversification. Diversification comes in many forms such as investing in various asset classes (stocks, bonds, real estate etc.), creating multiple streams of income for retirees, and various stocks or real estate assets within a portfolio. Spend plenty of time and effort now preparing your portfolio for the next 2008-style market calamity.
Have You Checked Yours?
We didn’t get another flat tire during the final days of driving. A third flat in just ten days would have been very unlikely. Sometimes it takes a bit of adversity and time out of your comfort zone to learn important life lessons. Risk management should come naturally, but a large percentage of people still live paycheck to paycheck and have no emergency fund. Some rock climbers don’t use ropes. And sometimes people drive a car with a deflated spare tire. Have you checked yours recently?
Craig is a former IT professional who left his 20-year career to be a full-time finance writer. A DIY investor since 1995, he started Retire Before Dad in 2013 as a creative outlet to share his investment portfolios. Craig studied Finance at Michigan State University and lives in Northern Virginia with his wife and three children. Read more HERE.
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