March 25, 2021
We all have opinions. Hopefully when we are making money decisions we have informed opinions based on facts, not emotions, or what someone else says.
But even when we think we are making a fact-based decision, there is one crucial step to consider before following through:
Ask yourself, “What if I am wrong?”
Or if you are making a decision with someone else—partner, spouse, child—the question is “what if we are wrong?”
Yet often that’s the last thing on your mind. When you are on the verge of a decision you are telling yourself a very specific story, based on what you think and what you want. That’s human nature.
What I am recommending is to make a conscious decision to stop before every decision and think through the consequence of what would happen if things don’t pan out as you think. By asking the “what if I am wrong?” question you are pushing yourself to understand the risk you will be taking.
With financial decisions, once you weigh the consequence it may compel you to rethink matters. This is not always about talking yourself out of something, but rather, deciding if you want to modify your decision to reduce the (negative) consequence if you are wrong.
Truth and Consequences
Here are some things I often hear people say.
I’m young. The odds of me getting really sick/dying are so small, I am not going to worry about health insurance. You’re right, younger people are less likely to have serious illness. But what’s the consequence if you’re wrong? It would be financial devastation. Or how about a related issue: I am young, I don’t need a health care proxy, or any estate planning docs. As Covid is teaching us, everyone needs a health care proxy who will advocate for them if they become unable to speak for themselves. And a durable power of attorney for finances is a must-- who’s going to pay the bills if you are really sick for a few weeks?
I’ll get to life insurance soon, I have time. Again, what’s the consequence if tragedy strikes when your kids are young? The odds of that happening are not zero. That seems like a pretty huge consequence to impose on your children and your partner.
I can’t handle the falling stock market. I am selling. If you are investing for a long-term goal, the consequence of this decision is that you will not be invested when the market rebounds. That’s what happened to so many people last year; they sold in February and March, locking in losses of 20%, 30% or more, and then that money wasn’t invested when the markets rallied and made money for everyone who didn’t bail.
Everyone is buying X, I am going to buy X too. One week it is GameStop, the next it is Bitcoin. Following the herd is not an investment strategy. If you are compelled to jump into something, ask yourself, what is the consequence if it doesn’t play out as expected? If you are investing a lot of money, that seems like a very big risk. If you don’t want to completely walk away, how about only investing a small amount of money and dollar cost average? That’s how you can best manage risk.
I will get serious about saving for retirement when I am 50. What happens if you are laid off in your 50s? There is no guarantee you will be able to save a lot in your 50s. The time to save is right now. Not tomorrow.
I will just keep working until I am 70. That is a great intention, but you still must consider the consequence that you may not be able to work until you are 70. Layoffs. Caregiving. Illness. Those risks should make it obvious that you still need to save now. Or downsize sooner than later.
I could go on and on, but I think you get the idea. When you stop to consider the consequence of a decision it will make your ultimate decision all the smarter.