Having a financial plans means not having to be "right"

I recently read Morgan Housel’s book, "Same As Ever: A Guide to what Doesn’t Change."

Being that Morgan Housel is my single favorite thinker alive...I wanted to share two more of my favorite passages & a few of my musings as to how it affects our planning. 

The way Housel writes about the intersection of money, emotion, personal behavior by weaving in lessons from history is incredible. 

I have quoted his previous book “The Psychology of Money" extensively in these emails and I want to do the same here with "Same As Ever: A Guide to what Doesn’t Change."

Before I get into more of my takeaways, I want to remind you of the premise of this book. It is that while people typically obsess over what changes over time, it’s actually far more fascinating (and important) to understand the things that NEVER change: the way humans strive to be happy, our penchant to be greedy or fearful, our overconfidence and shortsightedness, the way we think about risk and tribal affiliations etc.

All emphasis/bolds are mine.

Risk and Planning

“It’s well-known that people are bad at predicting the future. But this misses an important nuance: We are very good at predicting the future, except for the surprises—which tend to be all that matter. The biggest risk is always what no one sees coming, because if no one sees it coming, no one’s prepared for it; and if no one’s prepared for it, its damage will be amplified when it arrives. That’s the real definition of risk—what’s left over after you’ve prepared for the risks you can imagine. Risk is what you don’t see.

Risk is dangerous when you think it requires a specific forecast before you start preparing for it. It’s better to have expectations that risk will arrive, though you don’t know when or where, than to rely exclusively on forecasts—almost all of which are either nonsense or about things that are well-known.”

Gideon’s Note: 

I can’t think of a better argument for why Drucker Wealth (and all of you) are so committed to planning for the future & ironically why so many people never take the first step to do so. As I share with clients on every single meeting, we don’t map out your plan assumptions, income, expenses, future goals, and current priorities because we think your financial life will occur exactly as we map it out. Of course not. From the very first moment we run the numbers in Right Capital, your life is going to evolve. 

But if we can have a plan & an expectation guiding our financial behavior that gives us some context for the decisions we need to make in the future, well, we are that much better prepared when “the risk we don’t see coming” inevitably occurs. We have put ourselves in the best possible position to take what happen next in stride. 

That’s also why we talk so much about creating margin for error in your plan. I don’t consider it a “successful” plan if we need everything to go exactly as planned in order for the plan to work...we want to make sure that even if you don’t get that big promotion, or the housing costs slightly more than you think, or you decide to retire 2 years earlier, or the market earns 5% this next decade rather than 8%, that you still are on track towards your goals.

We are a tree bending in the wind rather than the tree that stands still...right up until the moment that it snaps. It’s easier (and more efficient) to update a plan than to start from scratch every time a change occurs. Simply put, you all understand that I’d rather be mostly right than precisely wrong.

I also find that there are some people that can’t wrap their heads around the fact that the plan they put together might need to be modified and so they never get started preparing for their financial future in the first place. They throw the baby out with the bath water. In their quest to wait until things are “settled” or they know “where things stand” (which is always a moving target) they don’t do the work that would allow them to have a better sense, directionally, of how things are going. They don’t allow themselves to understand if they are even heading in the right direction in the first place.

In their quest for certainty, they’re avoiding getting 10% better. 

We plan not because we know what’s going to happen...but because we don’t!

Certainty & Forecasting

“Most people get that certainty is rare, and the best you can do is make decisions in which the odds are in your favor. They understand you can be smart and end up wrong, or dumb and end up right, because that’s how luck and risk work. But few people actually use probability in the real world, especially when judging others’ success. Most of what people care about is, “Were you right or wrong?” “Was that a yes or a no?”

Probability is about nuance and gradation. But in the real-world people pay attention to black-and-white results. If you said something will happen and it happens, you were right. If you said it will happen and it doesn’t, you were wrong. That’s how people think because it requires the least amount of effort.

It’s hard to convince others—or yourself—that there could have been an alternative outcome when there’s a real-world outcome sitting in front of you. The core here is that people think they want an accurate view of the future, but what they really crave is certainty. It’s normal to want to rid yourself of the painful reality of not knowing what’s going to happen next.

Someone who tells you there’s a 60 percent chance of a recession happening doesn’t do much to ease that pain. They might be adding to it. But someone who says “There is going to be a recession” this year offers something to grab on to with both hands, something that feels like taking control of your future.

The inability to forecast the past has no impact on our desire to forecast the future. Certainty is so valuable that we’ll never give up the quest for it, and most people couldn’t get out of bed in the morning if they were honest about how uncertain the future is."

Gideon’s Note: 

I love this. He is, first off, explaining why humans CRAVE market & economy forecasts even though we know they are hardly ever right. It’s not rational. But humans rarely are.

I also bring this back to investing and our instinctive (and unfortunate) desire for “certainty.” 

History tells us that 3 out of every 4 years in the stock market has had positive returns. History tells us that every single 20 year period in the stock market’s history has had positive returns and that the stock market has earned north of 10% annual returns over the last 10, 50 and 100 years.

If you were to tell an alien these stats and then tell them that the stock market is considered a particularly “risky” investment, they would look at you like you had 2 heads. What about any of that is risky, our alien friend would ask.

And yet, even when we know the documented long-term outcome of investing in the stock market, we perceive it to be risky because there is so much uncertainty in the short term.

And uncertainty freaks humans out so significantly and so dramatically, that it’s difficult for people to even see the end game when your account goes down 20% (as it absolutely has and will again.)

Warren Buffet once said, “I would rather a bumpy 10% than a smooth 6%.”

Instinctively, we all know this to be true. But it can be difficult to remember this when you’re in the middle of the bumps.

That’s what we’re here for!! Managing expectations is just as important to your financial well being as the results themselves.

Morgan Housel said so.