Why You Should Save Like A Pessimist, But Not Invest Like One

Mathematician John Littlewood explained the presence of miracles through statistics. Littlewood's Law says we can expect a miracle every month. On the flip side, we can expect a disaster also as often.

We're currently experiencing a series of sequencing risk more often than usual, such as a pandemic, floods, earthquakes, and political meltdowns. Next year, a pandemic might have a 1% chance of occurrence, as could floods or political problems. But the idea stands that both bad and good things will happen this year and the years after that. It is not just current problem.

If you are aware that 'black swan' events are not so unusual, you can plan if such an event happens. That is the benefit of a high savings rate - it is easier to overcome an unexpected obstacle.

But there are limits. If you lose a house to a wildfire, then you're not relying on short-term savings to recover but on the insurance company providing you with the coverage you paid for. However, pessimism gives you an awareness that bad things happen.