In the Cards

Adam M. Grossman

IN HER BESTSELLING book Thinking in Betsretired poker champion Annie Duke stresses an important point: As kids in school, it was regarded as a failure if we ever answered a question, “I don’t know.” But in the world outside the classroom, the only honest answer to many questions is, “I don’t know” or “I’m not sure.” This isn’t due to ignorance. Rather, it’s because, in many cases, the precise right answer simply isn’t knowable.

A card deck has just 52 cards, but it’s still very difficult to know which one will come up next. When it comes to our personal finances, the number of moving parts is far larger. Result: It’s that much harder to predict what will happen. As Duke says, “The world is a random place.”

In fact, as a financial planner, I often find myself answering questions by saying, “There is no ‘right’ answer.” Absent a crystal ball, there just isn’t enough information to say with certainty how something will turn out. Consider, for example, the following questions:

  • Is it worthwhile to own international stocks, given that the dollar might strengthen?
  • Should I do a Roth conversion this year, since tax rates might go up in the future?
  • Should I rush to give assets to my children because the next president might lower the estate tax exemption?
  • Should I always take out the largest mortgage I can?
  • Should I buy inflation-protected bonds, in case inflation returns to double-digits?

In each case—and in many more—the only honest answer is to acknowledge that no one knows for sure. You might have an opinion, and that opinion might be well-founded. But anyone who claims that their opinion is anything more than an educated guess is simply fooling himself or trying to fool you.

But if that’s the case—if so many questions are unanswerable—how can you plan for the future? I recommend a three-step process:

First, recognize that “I don’t know” or “I’m not sure” aren’t the answer to every question. Many questions—what estate planning documents do I need, should I fund my 401(k), should I pay off credit card debt—do indeed have clear answers and aren’t subject to significant debate. When you encounter a financial question, it’s important to be able to tell the difference between those with clear answers and those without.

Second, take solace in the fact that some questions just don’t matter. The financial world is unendingly complex, and it can be easy to get distracted by arcane questions that appear to be important. Whenever a question comes to mind, always ask yourself whether it would make any difference to your financial future. That may allow you to tune out questions that otherwise would consume unnecessary mental energy.

For example, Wall Street brokers and the financial news devote a lot of their energy to speculation about the market’s day-to-day movements. But if you are a long-term investor who’s putting money away for a retirement that is decades away, it shouldn’t much matter what the market does next month or next year.

Finally, understand that “there is no ‘right’ answer” does not mean that there is no answer at all. Rather, it just means that there’s more than one possible outcome you’ll want to consider. And while there may be many, many possibilities, some will be more likely than others. I recommend that you identify the most likely outcomes and let that guide your financial plan.

To be sure, you should have a “Plan B,” should things turn out differently. But beyond that, I wouldn’t spend too much time getting hung up on every remote possibility, such as hyper-inflation or a Great Depression-style stock market collapse. Extreme scenarios are entirely possible. But before you worry about extremes, first be well-prepared for all of the more likely scenarios.

Adam M. Grossman’s previous articles include You—But BetterHappily Misbehaving and Laying Claim. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.

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