Recent markets befuddle even seasoned investors: the Dow’s up 200 one day, down 200 the next. Putting your money in Wall Street often means acknowledging and becoming comfortable with what you don’t, what you even can’t, know.
In the latest book of the Freakonomics series, Think Like a Freak, authors Steven Levitt and Stephen Dubner discuss the hardest three words for anyone to say: not “I love you” but “I don’t know.”
Certainly we all don’t know many things but can easily learn. We can Google a given topic and find facts in seconds. But Dubner and Levitt explore our tendency to carry on explaining – often in exhaustive yet inaccurate detail – things that no one can truly know.
You probably see people who often make up explanations that seem fitting and logical just to respond to a question or dubious circumstance. Dubner and Levitt suggest that this stems from people rarely facing adverse consequences for offering an answer – any answer – but fearing to appear unprepared or ignorant after admitting, “I don’t know.”
In many cases, though, those three dreaded little words constitute the only correct answer: Knowing what you don’t know can prevent a lot of mistakes. A universe of questions, especially questions about the future, simply have answers we don’t yet know. Our educated guesses don’t equate to certainty.
In money and markets, we always look toward the future and often try to know what’s coming. One thing you do know: No financial advisor can tell you with total assurance when or how far interest rates will rise or the effect on stocks, bonds or loans. Ditto for whether inflation will climb, how long the bull market will rally, whether international returns will catch up to those of the U.S. or how to preempt the next market skyrocket or plunge with a shift in your portfolio.
The Standard & Poor’s 500 volatility index (VIX), which measures price fluctuation and signals investors’ uncertainty (the bigger the number, the more the uncertainty), rocketed from about 10 last summer to around 25 during the market’s autumn nosedives. One day in early December, the VIX jumped a whole point in just 30 minutes. All Wall Street seems sure about anymore is uncertainty.
We do know many answers: investing rules and regulations and theories of portfolio management, for example. We know how much can you contribute to an individual retirement account in one year, the underlying expenses of a portfolio, a stock’s price yesterday and whether one investment mix got better returns last year than another.
The deep supply of detailed information about past doings of money and markets never gives us that most sure-fire of answers: certainty. We are left with a lot of assumptions that may create a wide range of outcomes, some good for our personal wealth and some not so good.
Because “I don’t know” is sometimes the only real answer, as an advisor I like to see a margin of safety in financial plans and assumptions about savings and investments.
We all want to know that even if expenses run higher than we foresaw, our life lasts longer than we expected or our investment returns come in poorer than anticipated, enough money still remains to cover the future. You can’t know, but you can sure prepare.
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Written by Gary Brooks, a certified financial planner and the president of Brooks, Hughes & Jones, and a registered investment adviser in Tacoma, Wash. Find risk tolerance resources at his blog The Money Architects, where an expanded version of this piece first ran.
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