Worry About the Right Things

Worry About the Right Things

Posted April 8, 2023 by Michael Batnick

“Do you know the difference between me and you?

Me: Happy, happy, happy, dead.

You: Worry, worry, worry, dead.”

– Catch-22.

The last few years reminded us that it’s more important to know how it feels to lose money than to make it. The only way to develop respect for risk is to experience financial pain. Once you’ve been burnt, you can develop a healthy anxiety around your personal finances.

Such is the case for a friend of mine. I’ll call him Rich. He’s known to be a worrier for much of his life. At first, he worried about the right things, like what he spent, saved, and even where he lived. Simple, manageable, and firmly within his control. His focus on financial efficiency served him well and allowed him to retire earlier and more comfortably than planned. He won the game.

When you dream of being in that position, you probably imagine all your worries falling by the wayside. Not for Rich. Now, the thought of losing it is what keeps him up at night. There’s nothing constructive about his obsessions. It’s always about things that are completely out of his control.

“Deep in the human unconscious is a pervasive need for a logical universe that makes sense. But the real universe is always one step beyond logic.”- Dune

Rich’s focus on the wrong things not only gives them power, but they leave the right things under-attended. He understands that bear markets are part of investing, yet he can’t embrace their inevitability. His success hinges on his willingness and ability to withstand discomfort. Financially, he’s able, but he’s not willing. Throw out the spreadsheets.

Instead, he worries about what impact the Fed, China, or WW3 might have on his portfolio. This is what’s left for him to contemplate after accounting for the things we can control, like diversification, the stock/bond mix, and a cash buffer.

Do you see the pattern here? He’s focusing on the risks he can’t entirely eliminate. Pure risk. As Cliff Asness said, “You get compensated for the risk you can’t diversify out of.” Everything else is somewhat actionable. It’s not perfect, but it’s enough. What makes it so hard is that his concerns are reasonable. Yet, he has no influence over any of them. Reasonable doesn’t always equal rational. Risk is inevitable. What is inevitable should be embraced.

Rich has a wealth management team taking care of most of the items above. He should feel comfortable with experts at the wheel, yet he spends plenty of time second-guessing them. Catastrophic scenarios are baked into his financial plan. And still he catastrophizes. He’s invested in a way that acknowledges the fact that anything can break at any time. Still, it’s a far cry from the predictability he craves. Rich is so caught up in the how that he often forgets his why.

Why does he invest in the first place? For two main reasons: to sustain his lifestyle over a few decades and ensure his assets grow to match his future liabilities. Healthcare costs are already a burden for his wife, and they have skyrocketed. That’s it. He doesn’t care about making a ton of money or beating a benchmark. He only cares about being able to afford the best care for his wife. So, he can’t afford not to own stocks. They’re the best vehicle to ensure she gets the best care in the future.

To continue reading, please go to the original article here:

https://theirrelevantinvestor.com/2023/04/08/worry-about-the-right-things/