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# 102 Six Reflections Prompted By The Pandemic

Thoughts about the pandemic, short-term survival, short-term financial safety, equity dividends and volatility, and the wisdom of converting labor into financial assets


These days, inevitably, so many stories and articles relate to the coronavirus pandemic. I thought I wouldn’t want to add to them. But there are a couple that got to me particularly, and a friend asked if I’d had any reflections based on what we’re going through. One morning recently I awoke and found that my subconscious had placed half a dozen notions in my mind. Here they are.


The first one is how to think about the pandemic. And the piece I’m referring you to is by my friend and co-author Keith Ambachtsheer (Ambachtsheer_Letter_April_2020_5 ).

He starts by referring to a new book called Radical Uncertainty, written by the justifiably well-known Britons John Kay and Mervyn King. The authors distinguish (as many have done, before them) on the difference between risk (where the probability distribution of potential outcomes is known) and uncertainty (where there isn’t a known distribution); and they say that all too often we deal with uncertainty mathematically, as if there really is a known distribution of outcomes – which is obviously ridiculous, even if it gives us unjustified comfort. Well then, how should we deal with uncertainty? By constructing a “reference narrative,” reflecting our knowledge and expectations about the subject under consideration, and then seeing whether the narrative unfolds as expected. A sort of “What’s going on here?”

How exactly do you do this? Keith shows how, using Covid-19 as the subject. I think his piece is brilliant. And incidentally I love his final observation, quoting (who’d have guessed?) Lenin: “There are decades when nothing happens … and weeks when decades happen.” Indeed.


My second reflection is summed up in the title of my last-but-one blog post: “First survive, then thrive” ( In times like these, that’s such an important perspective. Our long-term goals are, at least temporarily, pushed to secondary importance, as they have no relevance if we don’t survive. And assuming we do survive (as the overwhelming majority of us will), we’ll then be able to think again of our long-term purpose and motivation, and use them as drivers of our actions. In extreme situations (of which I hope this isn’t one) if we try to survive and thrive at the same time, we may not focus sufficiently on survival and may reduce our chance of doing so. In those circumstances it’s worthwhile to make surviving and thriving sequential, in our minds.

Surviving right now gets us into a focus on our health, and how we support ourselves in the short term. It’s clear from the news and from government action that worry about having a job to return to is undoubtedly a concern for many, as well. These are all (we hope) short-term considerations; and we hope we’ll get back to planning for the long term soon.


The third reflection is about the assets we set aside for short-term survival, in Life Two (that is, when we’re in the decumulation phase of financial life). I’ve written a lot about this aspect. For example, I’ve discussed safety and growth as investment goals (, and have written up a case study on decumulation (

In the case study the couple chose 5 years as the length of spending that they wanted their cash and short-term assets to cover. Most of my investment friends think this is over-cautious and over-long, and prefer 3 years, perhaps just one year. There’s a reason for the couple choosing 5, and it comes from Table I 21.1 in Stage I 21 (Historical Return Patterns) in Freedom, Time, Happiness ( – i21).

When planning a bit of safety in their longevity estimates, the couple decided they wanted to be 75% sure that they wouldn’t outlive the period of time they were using in their calculations. For consistency, they wanted the same 75% chance of success in their asset allocation. And what this meant was: how long should they give their (indexed) equity exposure to recover from a downturn, to have a 75% chance of the real (that is, inflation-adjusted) return over that period being no worse than 0%?

Of course you can’t foretell the future. So they decided to rely on long-term history, the results of which are shown in that Table I 21.1. And you’ll see that if they went with one year, their (historical) chance of success (recovery) was 67%. At 5 years it was 76%. And at 10 years it was 88%. That’s why they chose 5 years – almost exactly equal to 75%.

There’s no magic to 75%, obviously. They could have chosen 67% as their target, but they wanted to be consistent in taking a chance with investing and with longevity, and they couldn’t find longevity statistics to match 67%! And they could have chosen a 90% likelihood for both, in which case they’d have held enough cash to support 10 years of spending while waiting for a market recovery. But combining 10 years of cash with the length of the 90% longevity horizon would have given them almost no scope for growth, and would have dashed in advance any hope they had of living their desired lifestyle. So they compromised at 75%.

It’s not the sort of thought process I’ve ever seen used regularly. But it does have logic and consistency on its side.


The fourth reflection concerns the stock market. Of course it has been in hugely negative territory recently. But many people recognize that the dividend stream from equities is more reliable than the daily market valuations, and so they use equity dividends as part of reliable short-term cash flow. The hope, of course, is that the dividends can form a part of the income stream for safety, while the equity exposure gives them a chance of growth: winning twice, in essence.

And so a natural question is: how reliable is the stream of equity dividends? Or (more accurately, since we can’t predict the future, and right now it seems very uncertain indeed): how reliable have equity dividends been in the past?

I discussed this in Post # 75 ( And here’s what I found, historically.

Over one-year periods the biggest fall (in real terms, that is, after allowing for inflation) has been 34%; over 5-year periods 11%; and over 10-year periods 4%. In other words, the stream has historically been pretty reliable over the long term as a source of (real) cash flow, and two-thirds has been sustained even in the worst (historical) times.

Commentators are expecting potentially large dividends cuts, because of the pandemic. Let’s see how it compares with history.


The fifth reflection is about equity market volatility, or more precisely, the extent of falls in valuation. And here I refer you to an excellent analysis by my friend Fred Vettese ( Fred looks at US equity market history and divides bear markets (where the index has declined by at least 20%) into two categories: the plain-vanilla type, accompanying an economic slowdown following a prolonged period of prosperity (there have been 7 of these in the past 70 years), and the other 3 (of the overall 10 bear markets in the past 70 years, excluding this coronavirus decline), caused by an event that fundamentally changes our world, sometimes literally overnight.

He finds that the average decline in the first type has been 27%, and the average duration a little more than 10 months. With the second type, the average decline was 51%, and the average duration 23 months: essentially twice as severe and twice as long as the first type.

Read the piece (another keeper, like Keith’s) to see Fred’s discussion of the outlook and what one might do.


My sixth reflection is about job security following the pandemic – something I referred to in my second reflection. And my thought is that this is one aspect retired people don’t have to worry about. They no longer need to work for the income that supports their needs and desires, because they have saved in the past.

In fact this was the theme of my very first blog post (

Here’s an extract from it:

When you start working, your asset is labor. You use this labor to earn money to spend. That’s what enables you to survive, and also to thrive, to be happy; you won’t be happy with no money. Your labor asset declines over time. In fact, you want it to. You don’t want to have to make it last forever, to use it forever, until you pass away. You want to be able to stop providing it, ideally at a time of your own choosing, ideally at an age when you are still fit and energetic enough to enjoy the spending even more because you now have the time to devote to enjoyment. (In the old days this used to be called retirement. Again, think differently. This is just life after full-time work.) This is freedom! This is the control over our future that we all want.

To enjoy this phase of life, to even make it feasible at all, you have to convert your labor into financial assets. That means you have to save some of it. If you spend all of it, you can’t save any, and that defeats your purpose because you need those financial assets.

That’s what I said, right at the start. I hope you saved, or are saving now. If the answer is “yes,” I congratulate you. You’ve demonstrated wisdom.



One thought unites the reflections: that it’s worth doing some forward thinking, when times are less stressed. It helps survival through tough times.


I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.

4 Responses to “# 102 Six Reflections Prompted By The Pandemic”

  1. Ted Harris says:

    Seems we were headed towards a cyclical correction and/or recession, then got pushed by a microscopic factor. Concurrently, we are witnessing socio-economic bifurcation, particularly in much of the West, as well as some unwinding of globalism, as well as the machinations of a power shift – which tends to happen among leading nations in 250 year cycles, more or less. How governments respond and how their citizens perceive the response, will impact tilts to the left or the right, hence social programs and sharing of the economic/financial pie. Hopefully your Life One readers will heed your counsel. “To be forewarned is to be forearmed.”

    • Don Ezra says:

      Thanks very much, Ted — that is an amazingly long perspective! Now that you pull them together, yes, I do feel the presence of all of those forms of polarization.

  2. Mike Clark says:

    Hi Don

    Here’s my reflection which I have started to write on (as ever, if you have to write it down then you have to think straight…).
    I like a risk lens. Governments have managed risk poorly. They will have to do better. More government-policy-as-insurance. Think of the hospitals the UK has built and may never be used. Personally, I’m fine with the government spending my taxes in that way. Resilience is now the buzzword. Citizens seem likely to vote for politicians offering more resilience.
    Citizen savers (those citizens who have wisely been able to keep some of their labour-generated capital) often give their savings to asset owners (and I have met some who are annoyed weak government risk management has decimated the assets they steward). Of course, asset owners (governing fiduciaries), typically through well resourced managing fiduciaries, will get better at strategic risk management (SRM). SRM embraces both strategic asset allocation and all the decisions that flow from that plus Ownership (Proxy/Engagement) which is where asset owners flex their risk muscles before they get better at directing their portfolio managers through “better risk aware” mandates. We have started with climate. “Inequality” seems on the short list of (SDG-related) risks which will enter the investment domain.
    In finance theory terms, I am beginning to write about a NON-sustainability/resilience risk premium – stick that in your dividend discount model!
    For what it’s worth,

    • Don Ezra says:

      That’s a terrific thought, Mike — desiring a risk premium where sustainability ISN’T built in. It’s bound to come, I think, because any lack of sustainability implies a shorter horizon for growth followed by a decline, and that affects the present value in a negative way. Mathematically that’s equivalent to a sustainable profit stream discounted at a higher interest rate, which in turn implies a risk premium where sustainability isn’t built in.

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