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Two Sides of Luck

Unexpected opportunities and unforeseen tragedies are two sides of luck. We need to be prepared for both of them. To handle adversities, we need to save up for an emergency fund. This needs to be liquid — cash savings in a bank would be my choice.

To take advantage of good luck, we need to build up an opportunity fund. This can be smaller in the earlier phase in life, and you can grow it as we get older. Liquidity is less important here, as long as it's not tied up in relatively illiquid assets such as real estate. Blue chip mutual funds can be a good choice here.

But there's one more thing…

Although often under-appreciated until too late, there's also a sharp edge of luck. There lie the catastrophic events in your life. None of us can avoid these. Sometimes the events can do the most damage to us are the ones we don't even perceive to be risky.

For such a catastrophe which could lead to financial ruin, we need to play defence. There are two aspects to this: (a) we must get adequate term life insurance and health insurance, and (b) we need to protect our investments against wipe-outs. Regarding our investment portfolio, we must not emphasize only return and volatility, ignoring the risk of unlikely wipeouts. This is the reason I advocate keeping 5% of your investments as cash fixed deposits or gold.

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