Risk Reducer #4: Live in a Smaller House

Own a house that is less valuable than the one you plan to live in five years from now.

Risk Reducer #5: Have a Fixed Rate Mortgage Variable-rate mortgages are risky.

Risk Reducer #6: Invest in Other Currencies

Buy bonds that pay European euros or Japanese yen. Buy stock in companies that make a lot of money outside the United States.

Risk Reducer #7: Pay Off Your Debts

Rewards go to those with strong financial structures able to withstand (and profit from) adversity. Reduce your debts to build a strong hand.

Risk Reducer #8: Seek a Secure Paycheck

Now might not be the best time to leave a boring but safe job in order to start a restaurant or work for a start-up company.

The Risk of Low-Risk Investing

The Mean Markets recommendation to reduce financial risk is grounded in three macroeconomics truths:

1. Stock prices cannot grow faster than the economy forever.

2. Interest rates cannot go below zero.

3. The United States cannot run a trade deficit forever.

While these three are facts, picking the correct investments to profit from these changes is an exercise in economic forecasting. As we all learned, economic forecasts often boldly go to incorrect conclusions.

In the Foundation series of science fiction books, Isaac Asimov tries

something far more difficult than economic forecasting. Asimov suggests that the field of psychohistory can predict the future of society. Psy-chohistory is that branch of mathematics which deals with the reactions of human conglomerates to fixed social and economic stimuli. Psy-chohistorians claim that while individual behavior is unpredictable, social trends can be forecast based on the laws of probability.

Asimovs fictional psychohistorian, Hari Seldon, correctly predicts events for hundreds of years. Long after his death, the great Seldons prerecorded comments are played to generations of leaders on a secret schedule, and his accuracy would make even Nostradamus envious. Then, directly in opposition to Seldons predictions, the Foundation is conquered.

Even in a novel, forecasts tend to be wrong! How did Asimovs hero fail? The answer is that the Foundations conqueror is a mutant called the Mule. Based on probability, the chance of such a leader arising was so small that the laws of psychohistory could not anticipate such an unlikely turn of events.

Interestingly, wikipedia, an online encyclopedia, lists macroeconomics as a see also topic under the description of Asimovs psychohistory. Like psychohistory, economic forecasts are particularly bad at anticipating the effect of novel and unlikely events. If there is to be such a mule -like event within economics, it is the productivity increase that is possible because of information technology.

Everyone has been touched profoundly by information technology. My own personal stories stretch from knowledge-work to manufacturing. The Harvard Business School now uses an electronic course platform to coordinate all teaching activities and distribute materials to students. This has made my life as a professor vastly easier. All of my lectures are electronically uploaded to the web from my office and accessed in the classroom. Printed material is distributed to hundreds of students with the literal click of a button.

More concretely, my father-in-law Joel works for an American company that actually manufactures something-very high quality flashlights (some costing hundreds of dollars). I visited the flashlight factory and

found a giant room with a bunch of intelligent machine tools and three people. The people maintain the machines and feed them raw materials. With the right tools, three people can make a huge number of flashlights.

Everybody has similar experiences, and many are more dramatic than mine. Day by day, and in countless ways, information technology is making it easier to produce goods and services. As foreseen by the great economist John Maynard Keynes, productivity increases driven by information technology hold the promise of allowing humans to combine leisure with material excess.

Productivity thus holds the potential to cure Americas financial woes. Many of those most pessimistic about our financial future point to the massive debts we have both as individuals and through our government. For example, market seer Bill Gross of PIMCO is on record with his prediction that the Dow Jones Industrial Average will decline to 5,000.1 One of the reasons that Mr. Gross cites for his pessimism is a total U.S. debt level that-measured against the size of the economy-is the largest in history, exceeding even the bubbly 1920s.

Similarly, Robert Prechter (of Elliot Wave fame) cites similar debt statistics in many of his works, including his 2003 book Conquer the Crash. Mr. Prechter sees the possibility for the Dow to return to 1,000 or lower, making Bill Gross seem optimistic.2

Debt levels are indeed high. Furthermore, many aspects of our indebtedness are relatively new. The first plastic money, for example, was invented only in 1950, and widespread use of credit cards didnt take off until the invention of the magnetic strip in the early 1970s.3 Now that credit cards are ubiquitous, almost everyone drags around a hungry debt balance that requires constant feeding. We are acclimatized to think of such indebtedness as natural. Scholars of irrationality and cycles, however, point out that credit junkies can convert to frugality with chilling economic effects. Thus, the indebtedness of our society threatens our prosperity.

Just as a highly unlikely event surprised the laws of psychohistory, abnormally high levels of productivity can protect us from the seemingly inevitable consequences of our indebtedness.