This article originally appeared in the Minneapolis Star Tribune on November 5, 2012: http://bit.ly/PRsDOe.
We are in the midst of the most hated stock market rally in history. Nearly every bit of news we’ve heard and every detail we’ve read over the past four years would seem to suggest this rally would be impossible. It has occurred in the face of high unemployment, a declining dollar, low consumer confidence, huge deficits, wars, political unrest here and abroad, nuclear disasters, a poor housing market and more.
While financial markets continue to advance, investors continue to wait for the proverbial ”other shoe” to drop.
Our minds are incredibly powerful things that can make us believe almost anything. We rarely process facts by themselves. Rather, we consider them as part of a bigger story. This is why we cling so tightly to facts that support the story we want to tell and reject those that don’t fit.
Our brains conceptualize things most effectively through stories. Through a process of visualization and rationalization, we are able to use information to create patterns. This is the very mechanism that allows us to “get lost” in a great novel and bring the story to life.
The addition of more descriptive details allows our mind to paint a more precise picture. A great novelist is an expert at using words to produce images in our minds. We see the story unfolding in our head as we read the words on the page. While this is a very cool ability, it can severely impair our judgment and decisionmaking.
Politicians, campaign spokespeople and media pundits are master storytellers. The more detailed and vivid the details they tell us, the more believable their story seems. And because certain emotions, like fear, have a more profound impact than others, these emotions tend to “star” more frequently in the stories.
Campaigns frequently use fear as a weapon, and more specifically, campaign ads and themes are often focused on the fear of loss. Each is attempting to paint the other as a threat to our way of life in the hope of swaying a few votes.
This threat varies for each person. It may be a fear of losing the American Dream, a fear of losing certain benefits we are receiving, a fear of not being able to buy as much of the stuff we want, a fear of higher taxes, a fear of never being able to legally marry your longtime same-sex partner, a fear of your kids and grandkids having no chance to go to college, a fear of never being able to pay back your college debts, a fear of never-ending war, a fear of job loss or a fear of our democracy becoming socialized.
The world is not going to end if your candidate does not get elected. The economy is not going to unravel. And your personal economy is going to be affected far less than you might believe because most of the stories being told during an election year have no chance of ever coming true. We must keep that particular notion in mind as we assess the viability of the story unfolding in our heads.
This fear of loss in the face of uncertainty is one of the most powerful emotions we encounter. It is also the most expensive. Just as it affects the decision on which candidate you’ll vote for, it subconsciously drives how we spend money, make investment decisions and discuss finances with our partners.
While the natural tendency is to attempt to eliminate uncertainty from our lives, our energy would be far better spent learning how to live with and plan for uncertainty. Eliminating uncertainty requires an ability to predict the future with precision and accuracy, which is an impossible task. Human beings, politics and markets are inherently unpredictable on their own, and become quite the science experiment when you put them together. As the father of Taoism, Lao Tzu, concluded: “Those who have knowledge don’t predict. Those who predict don’t have knowledge.”
Planning in the face of nonsense requires us to focus on creating comfort margin in our financial lives. The best planning and investing strategies do not emphasize maximum results under the perfect conditions. Instead, they always involve a buffer, a margin of safety, that keeps us afloat under all conditions. Whether we are talking about cash flow, our investment portfolio, insurance or tax planning, great planning does not require us to make perfect decisions every time.
It does not require outsized returns or getting the lowest price on everything we buy, or getting the highest possible interest rate on our savings accounts. It requires consistently good — not perfect — behavior over long periods of time. It requires us to recognize when the stories we are being told — and the one we sometimes tell ourselves — are nonsense. And it requires us to acknowledge that it is far better to be approximately right, than run the risk we could be precisely wrong.