Lessons on Risk and Behavior from the Tragic Tale of the RMS Titanic.
On April 14, 1912, the RMS Titanic struck a large iceberg in the North Atlantic. It was a colossal disaster. It only took 2 hours and 40 minutes for the the most advanced, state-of-the-art ship at the time, to sink to bitter cold depths of the north atlantic ocean. And even more sobering, over 1500 people died.
The Titanic was engineered to not sink. And yet, it sank.
The engineers/designers that designed the Titanic had created the ship to be made of multiple compartments. Each compartment was separated by a giant bulkhead. The bulkheads extended up past the waterline. And each bulkhead had doors that could be sealed in case of a hull breach.
These bulkhead separated compartments were an insurance policy of sorts. If the hull was damaged, and water started to come in to one of the compartments, the doors would close. That compartment would flood, but the ship would remain afloat. They could then navigate to the nearest port for repairs. In fact, even if two or three of the Titanic’s sixteen compartments flooded, the ship could remain afloat. And only in an unthinkable scenario, even if the front four compartments flooded, the ship still wouldn’t sink.
The math made sense. The engineers thought of everything. And yet, what they failed to think of . . . happened.
When the Titanic struck the iceberg, five compartments were breached. One compartment breach more than the ship could handle. And water poured in. Eventually, the water from the flooded compartments overflowed the bulkheads into the remaining compartments sinking the ship.
What was supposed to be a triumph of engineering and a testament to luxury and innovation, only survived for a mere 13 days.Financial lessons from the Titanic's fateful maiden voyage. What can we learn? Click To Tweet
Risk Rarely Makes Sense.
Sometimes, the math makes sense, and it still doesn’t work out the way you thought.
You can analyze your situation, and prepare for every situation that you can think of. And still, you can’t control everything. There is always risk. Risk can be thought of as probabilities. And the higher the probability of something happening, the higher the risk.
The crew of the Titanic knew the risks of sailing through the North Atlantic in early April. Winter doesn’t leave quietly, if you know what I mean.
They ignored the risks because of their engineered safeguards. They were steaming at full speed, and when they sighted the iceberg, they could not turn the ship fast enough.
Mitigating the risks, in their case, would have looked like steaming slower in order to maximize maneuverability in the probability of an iceberg collision.
For us, go slower to mitigate risk, because risk rarely makes sense. The worst may happen, and again, it may not.
But don’t make a snap decision based on incomplete information or peer pressure. For example, only invest in things that you understand. If you don’t understand what bitcoin is, don’t invest in it.
If you don’t understand REITs, don’t buy any.
These investments are risky, and while knowledgeable investors may be able to mitigate some of the risks, they can’t fully eliminate them. But they understand the risks and are comfortable with them.
Personal Finance is More about Behavior Than Math.
If you structure your finances around only the math, you’re bound to hit an unexpected iceberg and sink your ship. Personal finance is about personal behavior. And all about mitigating risk.
Holding debt in favor of investing is an example of math trumping behavior. When you keep low interest debt around, like student loans or mortgages, while investing heavily in the stock market, you are only looking at the math. You compare the 3% or 4% interest on the loans versus the 7% or 8% that you could make in the market. But you don’t calculate in the risk of your investments going down.
And if the worst happens, and the stock market crashes? Do you have ice in your veins? Can you stay the course, and keep your money invested.
When a crash happens, and companies downsize due to the decreased share prices and capital available, will your job be secure? Will you still be able to make your payments?
A crash will happen eventually, and the wise will take steps to mitigate their risks. Which means ignoring the math, and paying down their debt. Because having no debt payments is a great financial strategy in either a bull or a bear market.
And certainly you may be able to weather a market crash if your job is secure. And you may be able to survive financially if you lose your job in a bull market. What if the market crashes and you lose your job? Would that be your “five” compartment scenario? Would your ship be sunk?
At Least Have a Lifeboat Available.
I’ve written multiple times about the inability of the modern American to fund an unexpected emergency. See this article about emergency funds.
They have no lifeboat in the event of a catastrophe.
The Titanic was equipped with 20 lifeboats. It was designed for 68! 68 lifeboats would have easily been able to accommodate the entire number of passengers and crew on board. In theory, everyone could have been saved.
But catastrophically, the Titanic was too much like most Americans today. The ability and means to provide an adequate disaster response, but woefully unprepared for the inevitable disaster.
So how’s your emergency fund doing? Are you ready with your lifeboat in the case of a collision with a financial iceberg?
Those who don’t learn from history are doomed to repeat it. Many changes were implemented in the time after the sinking of the Titanic. More lifeboats were required, and other safety measures were instituted.
In recent financial history there been several crashes. Both in 2008 and 2001, those who had little to no debt were better situated to thrive during those times. Many were ruined. Today most Americans seemed to have learned nothing from recent history.
Debt is at an all time high, and savings are at a low 6.7%. The warnings are sounding, yet the ship is turning too slow. Most of the passengers are still asleep, and most think that nothing has happened. Collision ahead!!!
The best thing you can do is pay down all your debt despite what the math says. And create a sturdy lifeboat . . . just in case.
For more reading about the Titanic, check out this Wikipedia page.
Are you ready for a market correction? Do you have a plan for “just in case”?
Please leave me a comment and tell me about it below. Thanks for reading and sharing. As always, I appreciate you taking the time to visit the Cash Dad.