Don’t Believe the Hype: Knowing What’s Possible vs. What’s Probable

Which of the following is possible?

• North Korean cyber-terrorists can hack into our banking system and wipe out our wealth.
• A magnitude 15 earthquake strikes in California causing the state to sink into the Pacific Ocean.
• Artificially intelligent robots replace 99% of global jobs leaving the population without work and income.
• The U.S. government could eliminate the Federal Reserve and go back to a gold standard.
• A large scale electromagnetic pulse could be detonated over the United States destroying our power grid, cells phone networks, TVs, radios, and the electronics in our vehicles.

If you answered yes to all of these, you get a gold star!

All of these doomsday threats are possible. It’s hard to argue that any of the above threats (or any others you’ve heard) could never happen. They absolutely could happen. Every single one of them. In fact, it’s possible all five of them could happen on the same day!

However, now ask yourself which of them are probable.

As an investor, the difference between possible and probable is one of the most important lessons you can learn.

Why? Early on as an advisor, I’d have clients frantically call me because they read something or saw a video about some impending disaster. Their immediate response was fear that they’d be hurt or that the stock market would crash and wipe out their wealth. As a novice, I’d get a bit frantic myself. However, once I got past the scary headline and did more research, I’d find that the chance of the threat was ridiculously small.

Could an asteroid strike Manhattan killing millions and decimating the country’s economy and financial system? Yes! But is it probable? Not at all.

Once you’ve asked yourself if the threat is probable, you can then ask yourself if the threat is actionable.

Is there anything you can do to protect yourself or your wealth? If you’re watching late night TV or listening to the radio, the solution might be “Buy gold!” The thinking is that gold will always have some value and that if the country or the financial system collapsed you could use gold. It’s a bit of a longshot, but let’s just say that was true. Okay, so you sell all of your investments and you buy gold. For how long? Forever? Until the asteroid hits? And this is where things start to not make a lot of sense.

You are afraid that a one in a bazillion (yes, that’s a highly sophisticated financial figure) event will occur and you’ll lose your money so you sell everything (incurring taxable gains) and buy gold which is highly volatile and regularly drops in value by double digits? This is what they mean by jumping out of the pan and into the fire.

Wasn’t it Newton who said every action has an equal and opposite reaction? The same is true here.

Before you give in to a fear-based headline or scary YouTube video prophesizing the collapse of something or the other, ask yourself what the consequences of your reaction might be. Every single time I’ve done this with a client, the reaction posed a much greater threat to their wealth than the fear they were trying to avoid.

In the aftermath of the financial crisis, I visited a potential client at her house. She had several million dollars but was worried that another financial crisis would occur and wipe out the world’s entire financial system. She didn’t want to invest or do any traditional financial planning. Instead, she was building a shelter and learning how to create a sustainable garden in her backyard. The threat was possible, but it was not probable. If her worst-case need-to-live-off- the-land doomsday scenario came true, her money in the bank would probably be worthless anyway. Sadly for her, she missed out on over $3 million of investment gains because she was so focused on what was possible that she didn’t want to consider if it was probable or the consequences of her reaction.

Before you make an emotional move, first ask yourself if the threat is possible (it always is) and then ask yourself if the threat is probable. Doing this will help you stay calm and will help you keep your wealth.

The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.