Minimizing the negative impact of failure

Diversification of risk matters not just defensively, but because it maximizes returns as well, because we expose ourselves to all of the opportunities that there may be out there.

Peter Berstein

Have you ever succeeded in one area of life while failing in another at the same time?

Crushing a workout in the morning only to miss a deadline at work later that day.

Completing a big project at work and getting a pat on the back from leadership only to come home to an angry spouse because you dropped the ball on something else.

Making huge progress on a new hobby or project only to realize you haven’t seen your family or friends as much as you’d like.

The juxtaposition between different outcomes can be bewildering. It’s difficult to understand how we can do so well in one area of life and be utterly failing in another pursuit at the same time.

Sometimes there are reasons for this and sometimes it’s entirely out of our control.

The worthwhile pursuits we choose to invest our time in have similar dynamics to the stock market.

If one stock is down 10% that day and another is up 10%, it’s not surprising at all. Certain global events like war or pandemics can move every stock in the same direction, but barring global catastrophe, the performance of individual stocks are not correlated with one another because each firm is so different.

The same is true with each area of our lives. Big events can positively or negatively affect everything, but on a day-to-day basis, the outcomes in each area of our life operate independently of one another.

Given the similarities, we can apply lessons from investing in the stock market to investing our time and energy in different areas of our lives.

Let’s consider two extremes of investing strategy: day traders and index investors.

Day traders make concentrated short-term bets to maximize their immediate returns.

This strategy incurs lots of risk and puts all of their eggs into one basket. If they are correct they have huge upside, but if they are wrong they lose everything because they don’t have anything to fall back on.

A day trader’s approach to life might be investing all their time and energy into their career in the hopes of money or power and it might just work. But if it doesn’t, they’re left with nothing. No identity, nothing to be proud of, nothing to inspire them or make them feel grateful.

Index investors use a diversified long-term strategy to reduce risk and maximize returns for the future.

They don’t have much potential for immediate returns, but they have a near guarantee that they will make a steady return over a long period of time. They spread their investments out across many different types of stocks so if one sector doesn’t do well it’s made up for by a different sector that is.

An index investor’s approach to life might be working a normal job, making time for family, making sacrifices to find time to exercise or work on a personal hobby, and seeing friends on a regular basis.

They probably won’t be the richest, the fittest, or the most famous, but if and when they experience hardship or failure in one area of life, they can lean on the other identities and pursuits they’ve invested in. Over time they build a portfolio of pursuits that ensures their life as a whole is moving forward regardless of setbacks in any individual area of life.

We should be thinking about how we invest our time and energy the same way we would think about investing our money. If we want to become a professional athlete or top-tier executive, we’ll have to take on some risk and go all-in to try and get there.

If we want to maximize the possibility of steady long-term growth, we should invest our efforts intentionally across worthwhile pursuits in each area of life and commit to sticking with them for several years if not decades.

When we diversify our pursuits we minimize the impact of inevitable failures and increase our surface area of overall improvement.

When we lengthen our time horizon we can weather any storm. Even if something negatively affects each area of our lives, we can see it as a small bump on a very long road instead of a shutdown without a detour.

Spreading our time and effort across too many different areas will prevent us from making progress on anything and investing all of our time into one pursuit opens us up to the risk of a big failure and identity crisis.

As with most things, the answer lies in the balance between extremes.

If we’d like a sustainable path to becoming a bit better each day, we can mimic the intentionally diversified portfolios of index investors with a carefully curated selection of worthwhile pursuits across the most important areas of our lives.

Prompts to Reflect

1. Is your life closer to the approach of a day trader or an index investor? Does this approach align with your long-term goals?

2. What is the most important area of your life right now? What happens when things don’t go well in this pursuit?

3. What is the right time horizon for the worthwhile pursuits in each area of your life?

Resource for a Deep Dive

• Master of Change: How to Excel When Everything Is Changing - Brad Stalberg

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