Admitting you don’t know something can be first step toward successful financial planning
In an ideal world, your life goals and financial resources would lead you down a path where you must choose route A or route B from time to time, but, for the most part, the options and outcomes would unveil themselves as expected.
Of course, financial planning and investing is more complex than coming to a simple Y in the path and making a decision. Instead, occasionally it’s as if you were dropped in the middle of an unknown metropolis where freeways intersect, on and off ramps intertwine, and your sense of direction is overwhelmed.
Given the multitude of investment choices (401k, IRA, brokerage accounts, mutual funds, ETFs, stocks, bonds, bitcoin, etc.) and the multitude of possibilities for combining investments into a money management strategy, it’s no surprise that people often struggle to make choices.
As Barry Schwartz wrote in “The Paradox of Choice”, “There is a cost to having an overload of choice.”
It leads to three effects:
Decisions require more time and effort.
The more decisions you have to make, the more likely that mistakes will be made.
Psychological consequences of mistakes are more severe. It is human nature to beat ourselves up for failures more than we celebrate successes.
Because of these effects, fear of making the wrong choice can lead to missed opportunity or the assumption that no decision is better than the wrong decision.
One benefit of good financial advice is the development of confidence in your direction. A trusted advisor can use insight to help you make actionable decisions, filtering out the noise in the pursuit of financial security. Proactively addressing your finances and life goals can help identify things that require planning, money and time to accomplish. This will help to narrow down the choices for how to proceed, focusing only on personally relevant options and opportunities. The choice paradox is addressed (not eliminated), and anxiety over choice is reduced when there is conviction for a plan and a process to monitor, evaluate and adapt over time.
Regardless of the extent to which your life circumstances change, you continually will be presented with choices or questions. Each time, you’ll feel some pressure to have an answer, even if you are unsure.
In “Think Like a Freak”, a book in the Freakonomics series by Steven Levitt and Stephen Dubner, a segment is devoted to the hardest three words to say – “I don’t know.”
Dubner and Levitt write about the tendency for people to carry on with explanations about things that they do not know. People regularly make up something that seems fitting and logical just to respond to questions. Dubner and Levitt suggest that this is because people rarely face adverse consequences for offering an answer, but they might appear unprepared or ignorant if they say, “I don’t know.”
In many cases, “I don’t know” is the only correct answer. There are too many things, especially questions about the future, that simply are not knowable. Being aware of what you don’t know can help address the paradox of choice and identify topics that need more information.
When considering money and investment markets, we’re always looking toward the future and often expected to “know” what’s coming. However, you likely don’t know, and no trustworthy financial advisor can assuredly tell you, when and how much interest rates will rise and what will be the impact on stocks, bonds or loans. It’s just the same for whether inflation will climb, how long the stock market will rally or how to anticipate the next market shift and modify your portfolio.
There are, however, many knowable, useful decisions that you can control. What is your savings rate, and can you increase it? Or, if retired, how much will you need to withdraw each year from your investments? How can you position your investments for more optimal tax efficiency and higher after-tax returns? How risky is your investment portfolio compared to alternative strategies? How much of your retirement cash flow will be made up of Social Security or other ongoing income sources? What are the expenses associated with your investments? There are many other known inputs to financial planning and investment management.
It is helpful to feel in control of some knowable aspects of your finances because there are enough other important influences that are unknowable. In these cases, where “I don’t know” is the only real answer, it is wise to make sure you have a margin of safety around your decisions. This means that even if your living expenses turn out to be higher than expected, life is longer than expected or investment returns poorer than expected, there will still be enough money left to cover the “I don’t know” aspect of managing money for the future.