If you’re unfamiliar with Nassim Nicholas’ Taleb’s “turkey problem,” it goes something like this: Every day, a turkey gets fed by a farmer. This happens day-in, day-out, without fail. This greatly increases the turkey’s confidence, as there’s never been any deviation from the pattern. The turkey has no impulse to flee the farm, or look for a better life elsewhere. Why would it? In the turkey’s experience, nothing exists to counter the notion that it’s safe and well-fed on the farm.
The turkey’s confidence may even peak the day before Thanksgiving, when the farmer finally slaughters it.
This is analogous to investors who put too much faith in past performance, or get lulled by appearances of predictability. The longer and more consistent something is, the more severe the results tend to be when it finally breaks down.
Why does this matter to single-digit millionaires?
Single-digit millionaires tend to share certain traits in common; traits that make them vulnerable to sudden disruptions, and the “turkey problem.” Some of these are:
- Being reliant on a high-income job, with few alternative income sources
- Excessive trust in the asset or process that helped them “make it”
- Setting their own children up for the turkey problem
1. Being reliant on a high-income job, with few alternative income sources
One of the most common ways to end up in the single-digit millionaire category is to be a highly paid employee. This is the quintessential doctor / lawyer / specialised engineer category, where you’re highly paid but not necessarily a sophisticated investor.
In fact if you’re this highly paid, chances are your job is so time-consuming, you have even less time or energy to manage a portfolio compared to the average working person.
But being reliant on your high-income job, and assuming it’s not going to end abruptly, is the very definition of the turkey problem. Doctors seldom imagine they’re going to be out of a job, for example – but when an unexpected event happens, like one bad malpractice suit – everything goes to pieces very quickly. You may be able to rewire a broken jaw back in place, or stitch a metre-long wound; but that has surprisingly little application when you realise the current job market mostly needs maintenance engineers, welders, crane operators, etc.
Senior positions and highly paid jobs tend to appear so stable, and so reliable, that they lull you into complacency. In the small chance that they come to a sudden end, and your income drops to a flat $0, the impact is far more severe.
For that reason, you need to diversify your income streams, even if you’re well-paid. Whether by getting rental income, stock dividends, savings plans, etc., try to ensure that at least a third of your income sources are unrelated to your job, and are sustainable without it.
2. Excessive trust in the asset or process that helped them “make it”
Some single-digit millionaires get there on the back of a single asset class. In Singapore, property is usually the favourite for this. Others tend to credit a particular methodology, or inherit their wealth from families that made it big in a specific field (e.g., palm oil plantations in Malaysia).
If you get to a single-digit million this way, there’s a tendency to place too much trust in the asset or method. There are, for instance, property investors who continue to pay Additional Buyers Stamp Duty (ABSD) on second, third, etc. properties. The high taxes mean they’ll never see the sort of returns they saw in the early ‘00s, but they refuse to change tactics because this is what worked in the past.
Likewise, there are single-digit millionaires who are in their 60s or 70s, who grew their wealth simply by saving as much as they could in a simple bank account. But they may not grasp that the interest rates of the ‘80s and ‘90s are not the interest rates we’ve seen over the past decade; and that simply stashing money in a savings account is a way to let it stagnate.
Simply put, the former road to wealth can make single-digit millionaires quite stubborn and inflexible. And the tendency is worse for them as, unlike their multimillionaire counterparts, they have less to invest in uncomfortable new areas. But markets change, people change, and there will come a day when the way you made your first million no longer works.
Accept and adapt.
3. Setting their own children up for the turkey problem
Most single-digit millionaires know not to spoil their children with too many decadent indulgences. But be aware: you can spoil them with an excessive sense of security too. Even if you don’t give them an outrageous allowance, consider if they’ve experienced volatility.
Unlike their less advantaged counterparts, the children of the upper-middle, single-digit millionaire group experience far less uncertainty. Fewer have been in situations where their allowance had to be halved, because the family has medical bills to handle. Perhaps none have ever had to go a few months with zero allowance, because a parent got retrenched.
This does make them less prepared for drastic changes: both in the event that your wealth / income are affected, and later in their own lives, when their earnings take a hit. You may want to consider shaking things up a bit, to teach them to cope with sudden changes in their allowance.
But you don’t have to be the proverbial turkey
In an ironic way, a certain amount of instability can actually help us.
Consider what happens when you invest in EM high-yield bonds, your brother-in-law’s scented candle shop, etc. When you go into such a risky investment, you tend to have your eyes open: you make contingency plans for failure, and you temper your expectations. If you happen to take a financial hit, well, you knew that might happen. You were braced for it.
In a strange twist, that makes these risky ventures safer than the very predictable ones, which trick you into thinking they’ll never change. These are known unknowns, whereas sudden changes in a predictable income source or investment is a pure unknown.
To avoid being the turkey in the problem, you need to do two things: diversify your assets, and start treating consistent things with the same level of suspicion as you would riskier products. In other words, do think about losing your job (even if you’re a senior partner in a monolithic law firm), or about what happens if your favourite industry vanishes.
If you want to know more about sustaining and growing your wealth, despite being in a seriously sandwiched HENRY position, reach out to us on Single Digit Millionaire.
