What If Everybody Is Wrong?

What if everybody is wrong? About everything.

With the benefit of hindsight, we can now cite plenty of examples from history where the consensus opinion was proven to be wrong.

Dating back to 600 BC, everyone agreed that Earth was the center of the universe until Copernicus proved them wrong in 1543.

Greek, Roman, and Islamic physicians all believed that the body consisted of four “humors” or temperaments—black bile (earth), yellow bile (fire), blood (air), and phlegm (water). It was believed that you only stayed healthy if these four humors were in the correct proportion with one another. If they got out of balance, you’d experience pain or illness. This became consensus in the medical community starting with Hippocrates in 400 BC and remained the foundation of mainstream Western medicine well into the 17th century.

The food pyramid, first published in Sweden in 1974 and introduced by the USDA in 1992, told us the optimal number of servings to consume each day from each of the basic food groups. We now know the pyramid to be a recipe for obesity.

This concept of the consensus being wrong wasn’t lost on Jesus. In Matthew 7:13-14, he said, “Enter through the narrow gate. For wide is the gate and broad is the road that leads to destruction, and many enter through it. But small is the gate and narrow the road that leads to life, and only a few find it.”

So it’s an interesting thought experiment to consider some of the things that are considered to be consensus now and ask, “What if everybody is wrong?”

What if continual advances in technology don’t automate everyone out of a job? What if, instead, technology eventually makes unemployment impossible?

What if CO2 emissions don’t do anything harmful in the long run, but simply make the earth’s climate steadily and slightly warmer, creating a more advantageous environment for life to thrive?

What if tariffs actually work in the long run and trade wars actually are easy to win?

What if Bill Cosby isn’t actually America’s Dad and he’s really just…wait, they’ve already debunked that one.

Who knows how we’ll look back at 2019’s consensus opinions 50 years from now. But I can promise you that the consensus will be wrong on some of them.

This should tell us there’s something that goes on in our brain that makes us absolutely certain that something is true, even if it isn’t. So, what does this have to do with your financial planning? Well…what if you’re wrong? About almost everything? Is it possible that you’ll someday look back on your current assumptions and realize that you were wrong? A few examples:

Assumption: “I don’t want to make any changes with my 401k; it’s done really well for the last few years.”

Reality: What if it’s done really well because the market has been terrific for the last few years, not because you’re an investing genius or because your 401k is a magical account that only gives you a good return?

Assumption: “I want to start my Social Security as early as I can. Who knows how long I’ll live, so I’m better off to get that money sooner, even if it’s a lesser amount, instead of putting it off until a later age and maybe only receiving it for a few years.”

Reality: What if a break-even analysis determines that you don’t have to live as long as you think for the higher monthly amount (started later in life) to work in your favor? There are compelling reasons in some cases to start your Social Security at a younger age, but unless you’re terminally ill, the “who knows how long I’ll live” mindset isn’t one of them.

Assumption: “I can find ways to spend less money once I retire, so I can go ahead and retire now.” 

Reality: What if you actually don’t have that much wiggle room in your monthly budget? What if spending less makes you absolutely miserable because you’re living on such a tight budget? What if you need to spend more in retirement because you want to travel?

Maybe you’re right about most of the things that you accept as obvious truths. But what if you’re wrong about just a few of them? What if you’re wrong about just one big one? Can your plan withstand that mistake, or will we one day look back at you as we now look at 17th century doctors putting leeches on their patients in an attempt to get their four humors back into the proper balance?

"Please Advise"

If you’re trying to create a pleasant ending to an email, you’ll want to steer clear of the phrase, “Please advise.”

In theory, the phrase “please advise” is just a sincere request for advice or guidance. But it seems like it really only gets used when someone wants to be passive aggressive.

Here, I’ll prove it to you. You’ve never gotten an email that sounds like this: “Hi, we’re really excited about the cookout this weekend and wanted to know what kind of food we should bring. Please advise!”

No, the “please advise” emails usually sound more like this: “Hello, we haven’t received payment for invoice #34007 which is now 14 days past due. Please advise.”

In other words, “please advise” is usually a special code used to convey annoyance, frustration, or a sense of “you need to get your act together or you’ll be hearing from our attorney/collections agency/mafia hitman.” But as the person using the phrase, it feels so much nicer to just say “Please advise.”

In the financial world, you’ll also find some special codes to make things sound kinder and gentler. Here’s just a few examples:

“High-Yield Bonds.” This is a special code for “junk bonds.” Now, which investment would you prefer to have in your portfolio—high-yield bonds or junk bonds? There’s certainly a use for junk bonds, but you can see how you’d automatically have a different feeling about them if you only knew them as “high-yield bonds.”

“Tax-Free Income.” At some point, you’ve probably heard commercials on the radio talking about special accounts/investments/strategies to create tax-free income in retirement. It all sounds very intriguing. But in this case, “tax free income” I just a special code for life insurance. They’re trying to sell you a life insurance policy, have you over-fund it for a few years to build up a nice cash value, and then withdraw from the cash value later to create income for yourself. It’s not a scam—it’s a legitimate strategy that works. The only problem is that it’s usually not necessary and sometimes an inefficient way to create that tax-free income for yourself. More often than not, it’s just a way to sell life insurance.

“Market Correction.” It sounds so much less daunting to talk about a “market correction” instead of a “market crash.” But a correction is defined as a decline of 10% or more. That means you could get away with referring to a 25% loss a “correction.” So if you have $500,000 in the market and you experience a 25% decline, that means that you lost $125,000. But you can see how it doesn’t hurt quite as bad emotionally when your stock broker says, “Yes, we had a market correction this quarter.” It makes it sound like something was wrong and the market was just retreating to where it should have been in the first place.

So just understand that people in the financial world are no different than the people in any other industry that want you to buy their stuff. Be aware that special codes like these exist and make sure you fully understand what you’re getting into.

And I can’t help but notice that some of you reading this blog post haven’t yet reached out to us for help. Please advise.

Please Excuse My Dear Aunt Sally

If you paid attention in algebra class a few decades ago, you probably remember learning about Aunt Sally. Nobody knows much of anything about Aunt Sally, only that her nieces and nephews feel compelled to apologize a lot on her behalf.

The phrase you might remember hearing (or muttering to yourself as you solved equations) was, “Please excuse my dear Aunt Sally.”

This was a simple mnemonic device designed to help you remember the order of operations for solving an algebraic equation. Please Excuse My Dear Aunt Sally translates simply to Parentheses, Exponents, Multiply/Divide, Add/Subtract.

So when you initially see an equation like this, it might just look like a jumble of numbers and you have no idea where to begin…

x = 2 + (3 x 4)2 x 6

But if you’ll just follow the very important order of operations and take it one step at a time, each individual step is quite simple:

 Original equation:           x = 2 + (3 x 4)2 x 6
Parentheses:                     x = 2 + (12)2 x 6
Exponents:                        x = 2 + 144 x 6
Multiply/Divide:                x = 2 + 864
Add/Subtract:                   x = 866

You can see how carrying out the operations in the wrong order would give you a very different answer. And without the order of operations to begin with, you’d be overwhelmed trying to figure out where to even start.

For most people, navigating your financial plan isn’t a lot different—either it all just looks like a jumble of numbers and you don’t know where to start, or you think you know what you’re doing, but you end up going in the wrong order. One particular area that seems to confuse people is the question of where to save for retirement—401k, Roth, IRA…something else? Well, here’s your order of operations:

1) Company Match: Contribute to your 401k/403b/457/TSP up to the amount necessary to max out your company’s match. Don’t leave any free money on the table. If they’ll match your contributions up to 5% of your salary, make sure you’re contributing 5%  of your salary and getting everything out of them that they’ll give you.

2) Roth IRA: Assuming that you’re under the income threshold and are able to contribute to a Roth IRA, go ahead and max out a Roth for yourself (and your spouse if you’re married).

3) Back to the 401K: If you’re in a higher tax bracket and would benefit from having more taxes to defer this year (and you’ve already funded a Roth), now you can go back to the 401K and max out that account for the year. You won’t be getting a company match on these extra contributions, but you’re still contributing to a tax-advantaged retirement savings vehicle. If you’re in a lower tax bracket and you aren’t as interested in deferring taxes this year, skip this step and go to Step 4.

4) After-tax investments: If you’re maxing out a Roth IRA and your 401k and you still have money that you want to save for retirement, you can do it in any number of after-tax investments. It could be a brokerage account where you’re investing in the same types of funds that you have in your Roth and your 401K, just without the tax advantages. Or maybe you’d prefer to invest in something like rental property. Or maybe you’d rather use this money to get your mortgage paid off early.

It’s important to point out that, unlike the unflinchingly rigid laws of algebra that are always perfectly consistent in all cases, the order of operations in your financial situation might require some customization to fit your life. But if you’re navigating a jumble of numbers and trying to figure out where to start, stick with this plan of action and you’ll be on the right track.

And tell Aunt Sally that she’s excused.

Not Exactly Like Riding a Bike

Castaway Cay might be the greatest place on planet earth.

If you’re not familiar, Castaway Cay is a private island owned by Disney. The only way to visit the island is by hopping aboard a Disney cruise; all of their Caribbean itineraries stop for a day at Castaway. Somehow, and I don’t really understand how this works, it’s always between 74 and 82 degrees on the island, regardless of what time of year it is. A few dozen Disney employees live on the island, with nothing to do except keep it clean and prepare delicious food.

On our most recent trip to Castaway Cay (which was our fourth),  we decided to take part of the day and do something a little different from our usual routine of hanging out on the beach and gluttonously partaking in the buffet. Most of island is remote, with nothing but a bike path, so we rented bikes for a family ride around the island.

Lilly had her own bike (with training wheels), Molly had a regular bike, and I had a bike with a seat on the back for Amos to hang out in. Sure, I was wearing flip flops and hadn’t actually ridden a bike in probably 20 years, but riding a bike is literally the essence of something that you can’t forget how to do. How many times have you heard, “It’s just like riding a bike?”

Well, I quickly discovered that riding a bike, for the first time in a couple of decades, while wearing flip flops, with an almost-three-year-old in the back who kept drifting off to sleep and falling over to one side and throwing off the weight equilibrium…is actually not just like riding a bike.

You would have never been able to tell if you were just watching from afar, but at no point during our hour-long ride did I ever feel comfortable. The child seat on the back really makes it a lot harder to balance and accentuates your steering adjustments so that each slight shift of the handlebars created a giant steering overcorrection that had me constantly swerving back and forth. And right when I’d have a stretch where things were going somewhat smoothly, Amos would fall asleep again, lean over to one side, and nearly send me careening into the ditch. I never actually fell over, but I felt nervous and unstable the whole time.

So as I unsteadily wobbled my way back and forth across the island, it occurred to me…this is what retiring is like for a lot of people.

You’ve seen other people retire and it looks like a lot of fun. And as you start thinking about your own retirement, it really seems like a great idea. But then you actually start doing some of the things on your checklist—applying for Social Security and Medicare, nailing down a retirement date, helping train your replacement, making pension decisions, trying to be confident that you have enough money saved to last the rest of your life—and suddenly you feel unsteady and nervous and worried that you might have an embarrassing crash at any minute.

I’ve been guilty of lacking empathy for this feeling over the years, for a couple of reasons. First, I’ve never actually retired myself, so the whole planning process is just an objective, mathematical exercise for me. Second, once you’ve helped enough people through this process, you realize that, sure, there are landmines that you need to be aware of, but when the numbers in the plan work, they work. To me, it’s like riding a bike. What’s there to be nervous about?

So from now on, I’ll be more cognizant of the fact that when I’m helping you make the move from earning a paycheck to using your investments to create a paycheck, while it might seem simple to me, you’re probably going to feel nervous and unsteady, no matter how many reassuring things I say to you.