Investing, Risk, and the Money Trap of Status and Military Finances

When it comes to money, the decisions we make are often influenced by more than just numbers. In fact, much of our financial behavior is driven by our psychology, social surroundings, and deep-seated need for belonging. Whether you believe humans have been around for 3,000 years or 300,000 years, the inescapable reality is that for 99% of human history we lived in tribes, clans, and extended family groups. In those settings, everyone shared their resources, meals, and wealth -- and those who stole, or never shared in the first place, were cast out, exiled, or killed. In other words, every cell in your body has been conditioned to believe that what really matters is what the people around you think of you.

Unfortunately, life in our modern world is far safer, easier, and wealthier than ever before. We no longer run with a group of 50-100 people with whom we share a total dependence on survival: instead, we can each go to work, earn a paycheck, and live a comfortable life all on our own, with no outside help. In fact, and especially in the good old U.S. of A., we increasingly don't even know 50-100 people -- most of us don't even know the names of our neighbors, the cashier at the supermarket, or maybe even our coworkers. And yet we still try to impress them all the time with the stuff we buy, cars we drive, and clothes we wear!

This is especially true in the military, where rank, possessions, and appearance convey power and status. In our military culture, we want to be seen as having more than we can afford: we often signal a promotion to everyone on base with a new car (or at least a shiny and noisy upgrade to the pickup truck we drive).

On top of that, we feed on risk: we shoot guns, drop bombs, fly jets, launch missiles, jump out of planes, and, at least in the Navy and Marine Corps, spend a few hours each week trying to hurt each other while improving our "mental toughness" and "pain tolerance."

In other words, in the military we are obsessed with status and desensitized to risk, which in life -- and especially in personal finances and investing -- is an extremely explosive combination. The reality is this combination is a major force in why service members and military families are especially prone to risky financial behaviors, like overspending on a new car or home to fit in with peers. The numbers reveal the real cost that the military pays for this toxic mix of status and risk:

• An average credit card debt of over $10,000, nearly 25% more than the average civilian
• 60% of military families have less than three months' expenses saved; 1 in 3 have $0 saved
• Average retirement savings by age 30 of less than $10,000, less than 1/2 of our civilian counterparts
• While 40% of civilian divorces blame financial difficulty, money stress is the #1 problem in 56% of divorces amongst military families

In other words, we have an extremely distorted sense of risk and responsibility, and we're paying for it.

The Psychology of Risk: Tolerance, Capacity, and Propensity

The main reason why service members have so many problems with risk is because we're trained to seek it out and tolerate more risk, but we aren't educated on how to understand it in different situations. In the case of finance and investing, this is especially true. You may have taken some financial quizzes from the Thrift Savings Plan, NerdWallet, or your brokerage like E*Trade or Vanguard to assess your risk. You're asked questions about how you "feel" about risk, losing money in the stock market, etc., and then you're recommended investments based on that.

The problem is that your "feelings" about risk are only one third of the picture -- and the least important part at that! In fact, there are three types of risk that you need to understand when you're getting into investing:

 1. Risk Tolerance: This is how much risk  you say you are okay taking on. Some people are comfortable investing in high-risk, high-reward assets like stocks or crypto, while others prefer the safety of savings accounts or bonds.

 2. Risk Propensity: This refers to your natural reaction to risk and loss. People with less risk propensity are likely to panic sell when an investment loses money, so a high propensity for risk is essential to play the long game and create life-changing wealth.

 3. Risk Capacity: This is how much risk you can afford to take, based on your financial situation. Even if you’re comfortable with risk, you may not have the capacity to handle big losses if your finances are already stretched thin.

Understanding these elements of risk is crucial because many service members find themselves saying they’re willing to take on risk (trading crypto, for example), but then lock in awful losses selling when the market is down because they can't tolerate the risk -- or worse still, they ruin their and their family's finances because they didn’t have the capacity to take on that risk in the first place.

The Disconnect Between Risk Tolerance and Actual Behavior

This is why the online quizzes (or maybe one given to you by a "professional" Financial Advisor or Retirement Planner if you were tricked into hiring them) are so dangerously misleading. For the average civilian who isn't such a risk-taker as an F-15 pilot or Army Ranger, they might luck out and have a tolerance that is very close to their propensity: they know they would panic sell during the next stock market correction of 20%, so they answer that they aren't too risky and then invest in a mix of stocks and bonds. On the other hand, our Gung Ho warriors respond "I love risk" and then start trading options and crypto, only to find out later when 50% of their portfolio is gone that they don't feel the same about losing their retirement savings as they do about risking an arm or leg in combat.

This mismatch between perceived risk tolerance and actual behavior can lead to damaging financial decisions: (1) you will invest in something that is riskier than you actually want, and (2) you will panic sell and lock in losses throughout your investing life. Instead of enjoying an early retirement at 55 living in a bungalow on Maui, you'll be building spreadsheets for Booz-Allen until you're 70th birthday.

This is why it’s critical to generally disregard the results of any quiz or questionnaire that attempts to measure your risk tolerance (or "appetite for risk", among other labels). It might be interesting -- but it's an extremely poor guide for your investment decisions.

Instead, you need to fully understand your propensity for risk, or how you'll react to a loss. The easiest way to do this is to look at your past actions, and base future investment decisions on those. For example, if you sold all your stocks in March 2020 during the COVID crash, you locked in 20-30% losses for your portfolio: you clearly have a "low propensity for risk." On the other hand, if you didn't sell, kept investing (and maybe even deposited more cash to "buy the dip", you can clearly handle the risk! If this is you, you can feel confident in your ability to create massive wealth in the long run because you can endure short-term setbacks.

But even if you did panic sell, there's no need to doubt your future investment choices and as a result get out of the game. After all, if you want to afford any sort of retirement before 80, you need to invest $100,000s of your savings in the stock market (or rental real estate) so you can create the $2.5-5 million needed to retire someday. If you fit the "low propensity for risk" profile and panic sold last time the market dipped, you need to put in place controls and defensive trades to protect your investments. Examples include Stop-Loss Limit Orders, options -- or maybe even just hiring a professional to do it for you.

The Disconnect Between Risk Tolerance and Capacity

Your capacity for risk is based on what you can monetarily afford to lose. For example, if you have $0 in your Emergency Savings Fund, $10,000 in credit card debt, and a car loan, you have nearly zero capacity to lose any money in crypto or the stock market. It doesn't matter if your part of the SEALS' DEVGRU or an Air Force PJ and can handle more risk than Elon Musk: if you can't afford it, you can't follow through on it.

While over-estimating your tolerance or propensity can lead to gut-wrenching investment losses, ignoring your capacity for loss can result in your losing everything -- maybe even your family. In our example here, imagine investing your entire $25,000 Continuation Pay Bonus in a new cryptocurrency that someone on TikTok promised you would "100x in the next bull cycle", but that instead goes bankrupt. At the same time, a major storm knocks over a tree on your car and house. You have no emergency savings and your credit cards are already maxed-out. To keep going to work, you buy a new car with debt, but you can't make the monthly payments, so the bank repossesses the car. A few weeks later after more crypto-betting, you lose even more money and the bank freezes your accounts, while the Department of the Navy garnishes your paycheck to pay the auto loan (which they legally do in the military!). Broke, car-less, and with no money for anything, your spouse takes the kids and leaves.

This scenario plays out in one form or another thousands of times every year in the military. Don't put yourself or your family in this situation, and make sure you have the capacity for risk and loss before you start making risky investments (and, yes, all investments are risky). Here are some key "pre-reqs" for anyone to complete before getting into the investing game:

• Have enough Emergency Savings to pay for a crisis. For most in the military, $8-10,000 is enough, but as you get married, buy a house, and have kids, this can grow to $30-40,000 or more.
• Eliminate Consumer Debt. At the very least, pay off all credit cards, personal loans, and payday loans.
• Create (and Use) a Budget. To ensure you don't make careless purchases or lose control of your finances, make a budget -- and stick to it. Give yourself an "investing allowance" each month that you can afford to save and invest -- and lose in the worst-case scenario -- without hurting your finances.
• Be On the Same Page. Talk with your partner or spouse before investing and make sure you're both comfortable with the financial plan. Just because you love risk and are willing to gamble it all away on the next AI "wonder stock" doesn't mean your partner is.
• Be Patient. Get rich quick investments don't actually exist. The desire to rapidly create wealth so you can spend and achieve some sort of status in the eyes of your friends can lead you to still make dumb decisions. Once you know what you can risk, sit back and in time you will reach your goals.

As always, when it comes to investing and risk, do your own research and make your own decisions, then be accountable for the consequences. At the end of the day, personal finance is personal, and you have to do what makes the most sense, and is hopefully best, for you and your family.

Military Tribalism, Belonging, and Risk

The final hurdle to overcome leads us right back to the ridiculous pursuit of fake status that is promoted in our military culture. Of course you've lusted for a shiny Dodge Challenger since you were 10 years old, but just because you get promoted to E-3 doesn't mean you can afford it. Besides, you wear your rank on your sleeve/collar/chest, and everyone knows who you are and how much you make. You can't fake it!

If you take a look around, you'll realize everyone is glued to a screen anyway, and no one is even paying attention to you. If you really care about how you look and how people perceive you, this has to be a shocking and painful reality-check: no one cares. To all the fresh O-1s and O-2s out there, take it from me, a fellow truck-lover who upgraded the exhaust every year to something louder and louder, trying to show off to everyone in the unit. You will soon discover three lessons: (1) no one can hear/see you over the sound of their own exhaust/music; (2) you will be broke paying for it; and (3), there will always be an E-5 in your unit whose truck is bigger, louder, shinier, and faster. In other words, you won't win!

It's also worth reading The Millionaire Next Door: The Surprising Secrets of America's Wealthy by Thomas Stanley. You'll discover that real wealth and status isn't flashy or seen outwardly, but is instead in the bank and brokerage accounts. One day you'll realize that the E-7 or Chief Warrant Officer who rode a $3,000 dirt bike to work every day for 10 years and wore Walmart jeans to every unit social event was quietly investing $50,000 or more each year in their TSP and real estate. After 20 years in the military, they retire -- really retire -- because they're financially free, the true definition of wealth. Meanwhile, your O-5 commander who bought a Range Rover Sport for her promotion present to "look the part" is panicking about getting out because she has less than three months' expenses saved. In her pursuit of status, she stayed broke.

Conclusion: Discovering Your Risk Profile

In the end, balancing your sense of belonging with responsible financial choices is key. Over-spending or taking on too much risk either because you've been trained to believe you're invincible, or because you think you need to have all the best and newest things to "show out" to your peers at work, is likely to produce financial disaster. Only you won't see it coming because you don't understand how you respond to risk and loss (risk propensity), or your ability to handle loss (risk capacity).

Take the time now to look back at how you've handled financial adversity and loss in the past, and updating your investment strategy to match your actual behavior, and not what you thought you could handle.

Most importantly, get your financial house in order so that you can build the capacity to take on risk. Fully fund an Emergency Savings Fund, wipe out bad debt, and set an affordable and sustainable monthly budget for investing so you don't put everything you've gained at risk. If you're in a serious relationship or marriage, do it as a team; once your children are old enough to understand and have a say, perhaps as young as 7 or 8, bring them into the huddle and make it a family decision. Your fun-loving 9-year-old may not want mommy and daddy gambling away their future college tuition trading GameStop options on Robinhood!