Personal Finance Friday - Oh for sure! 100%!

The title of this post is always 100% wrong, lol the irony.

In personal finance and every other area of life, we all have the tendency as humans to simplify and make absolute statements about everything. Something is either evil or good, fun or boring, right or wrong. It's one of our greatest weakness, it is almost always, if not always, more complicated than we think it is. If you find you are absolutely sure about something, I guarantee (well most likely lol I hope you get the joke) you are not thinking about it very carefully. Next time you feel something is absolute, spend 5 minutes and talk with someone about the other side of that, see where the gray might enter the picture. Absolutes get us in trouble, they have us put all of our money in a single investment because its "a sure thing!", they have us sell everything because the stock market is going to crash! (and then it doesn't).

Good investors, and people good with money understand this principle deeply. Everything is a probability in life and finance. You are not God, you do not know what the future holds. That is nature of being a lowly human, we literally can't know things for sure (we can definitely feel like we do, but that is not the same!) That being said you can look at history, you can observe the world around you as objectively as possible, you can see the trends, and you can make educated guesses as what might happen. But if you are doing those things properly, you should come to the conclusion that there are many forks in the road that lead to the future. The question in personal finance is how do you prepare yourself for the most likely and the potentially most impactful paths?

Let me give you an example of my thought process here. The US and the world continues to pack on the debt to their collective societies, we have negative interest rates in many parts of the world, we have politicians how are advocating printing money to pay for things, we have deep technological changes happening in many places... What does this mean? There are many paths the world can take from here. We could have a break towards heavy spending governments to satisfy populist demands, and huge run ups in debt that in the end cause massive inflation and the loss in confidence in the world's major currencies. We could muddle along with maybe a crisis in one country being a catalyst for reforms in others. There is the small chance that some of these people understand economics better than economists and we can have our cake and eat it to, and we end up in a golden age of growth and prosperity for everyone.

When thinking about your finances, you need to think about all of these scenarios, and the many other crazy things that might happen. What do you do to balance the bad that might be coming with the good that might be coming and trying to enjoy your life now as compared to in the future? These are super hard questions, but they are some of the most important decisions you will make. Burying your head in the sand and just hoping for the best, is dumb, and in the end you will reap the consequences of that. As I said in the last post, do the hard work and start thinking about what you want, how your going to get it, what the future might look like, and how all those things come together.

As always these posts are as much an admonishment to myself as they are to anyone else out there!

Add on: I usually have my wife look at these posts beforehand, and her comment was "but what are the practical implications?" So let me throw a few out there... As we mentioned before, being perfectly efficient in our investments is not always a good idea. Having extra cash though not the "best" use of money is a way of staying flexible, and giving you the ability to absorb shocks. That does not give you a ticket to have all cash in your 401K because your scared of the stock market though! Investing in things outside of the normal fits this idea, having some precious metals, investing in yourself and your education, paying down restrictive type debt like student loans, and maybe not paying down other kinds of debt like mortgages. Saving more money now just in case something happens you didn't plan on is a huge lesson here. Ya you might die tomorrow, but probability suggest you won't and you'll have to live with your choices for decades to come so take that into account. All these things are about taking the complex, unpredictable, unknowable nature of the world and making sure your finances are aligned with that reality. Invest for the future, remain flexible, diversify, and pay attention.