Dec. 4, 2014
In the latest book of the Freakonomics series (Think Like a Freak), authors Steven Levitt and Stephen Dubner wrote a segment about the hardest three words to say. They are not “I love you.”
Rather, humans find it very difficult to say “I don’t know.”
Certainly, there are many things that we don’t know but could. We can Google it and know in seconds. But what Dubner and Levitt write about is the tendency for people to carry on with explanations about things that truly cannot be known. People regularly make up something that seems fitting and logical just to respond. Dubner and Levitt suggest that this is because people rarely face adverse consequences for offering an answer but they may appear unprepared or ignorant if they say “I don’t know.”
In many cases, “I don’t know” is the only correct answer and knowing what you don’t know can prevent a lot of mistakes. There are too many things, especially questions about the future that simply are not knowable. We can make an educated guess but that doesn’t equate to certainty.
In the business of money and markets, we’re always looking toward the future and often expected to “know” what’s coming. However, no financial advisor can assuredly tell you when interest raise will rise, how far they will rise, over what time frame and what will be the impact on stocks, bonds, or loans. It’s just the same for whether or not inflation will climb, how long the stock bull market will rally, whether international stock returns will catch up to U.S. or how to preempt the next market shift with a shift in your portfolio.
There are many things we do know. We know investment rules, regulations, portfolio management theory … How much can you contribute to an IRA? What are the underlying expenses of an investment or whole portfolio? Has this investment mix experienced a better risk-adjusted return over time than that one? How much of your retirement income will be made up of Social Security? And many other known inputs to financial planning and investment management.
There is also a deep supply of detailed information about past circumstances of money and markets. But we can never know how much that tells us about the future. So we are left with a lot of assumptions that may create a wide range of outcomes.
Because “I don’t know” is sometimes the only real answer, we like to see a margin of safety when we create financial plans and assumptions for people. We like to know that even if expenses are 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.
If you have questions, please contact us. If we don’t know the answer, we’ll quickly learn those things that we can know and for those things that can’t be known we’ll try to help you get comfortable with the probability of what might happen without completely being able to predict the future.
Gary Brooks, CFP®
Allyn Hughes, CFP®, ChFC®, CLU®, CAP®