Worry About the Right Things

My colleague Nick in Louisiana wrote something excellent that I wanted to share with you. Hope everyone is enjoying their weekend.

“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.

As a colleague says, “The thing is not The Thing.” Delegation leaves some people feeling liberated and others helpless. Free time is a blessing and a curse for the retiree. Outsourcing his plan freed up his mental capacity, but plenty awaits to take its place. The future is more certain for some and less certain for others. Rich fears he won’t be able to give his wife the best care possible. He’s afraid he won’t be able to fulfill his duty to her. In sickness and in health.

It’s easy to chastise Rich for his behavior. It takes effort to understand where it comes from. He could be more comfortable with his ability to cover future health costs if he better understood the mechanism he’s using to do so. He began investing for the first time in the late 1980s. One of his first experiences with the market was the crash of 1987. At that time, friends on Wall Street were who he relied on for advice. They were selling to prevent further potential losses. He followed suit. The market ended the year with a gain. Rich crystallized his losses.

Being a new investor in an outlier event is like building a house on top of quicksand. What little foundation that existed was left unattended and soon eroded. His Wall Street friends worked for a hedge fund. Investing like a hedge fund is miles apart from the way most people invest for retirement. Rich learned the wrong lessons. He didn’t learn how to be patient or persevere. Instead, he leaned into his default mode of cynicism, his safety blanket. Can we blame him?

Perspective is everything, and from his perspective, he’s now seen four black swans in his lifetime. At some point, you gotta ask, “How many goddamned swans are there?” The most dangerous words in investing are “That’s never happened before.” Unprecedented things happen all the time. Some people experience a shock and become more clear-eyed going forward. Others never leave the fetal position. By definition, a Black Swan is “an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.” (Investopedia) Less than often, more than never.

Morgan Housel says the only way to stay wealthy is through “some combination of frugality and paranoia.” Rich has the paranoid part down. Seeing the worst in everything is his natural disposition.

Frugality is part of being an investor. It’s optimistic in a sense because sacrificing something today requires faith in tomorrow. Finding a balance between pessimism and optimism is the challenge.

Anxiety is a form of energy. As explained by the first law of thermodynamics: energy can neither be created nor destroyed. It only changes form. Rich used to worry about saving money, but now he worries about spending it. Instead of relenting, he displaces. Free time is a blessing and a curse for the retiree.

Retirement is a transition, not an event. The income stream he relied on for three decades has been disconnected. Separation anxiety is expected. How can he be sure that the next bear market won’t cause permanent damage? Confidence requires proof that he can do it.

Wealth is relative. It doesn’t matter how much money you have if you don’t have the peace of mind to go along with it. Are you truly wealthy if you are constantly overcome by the thought of it disappearing? Are you less wealthy at $3 million than your neighbor with $1 million if they’re content and you’re not?

You can’t time the market, but timing is everything. As Morgan Housel points out in The Psychology of Money, “When and where you were born can have a bigger impact on your outcome in life than anything you do intentionally.” How different would Rich feel if he began investing in the early ‘80s, mid-90s, or 2009?

The reason why the last arbitrage in investing is human behavior is that it’s everyone’s first time. That’s why this time is never different. The emotions are constant. It’s always everyone’s first bear market under “these” circumstances or at this stage in their life. They just had kids, or they’re paying for college, or need the funds for a down payment on their dream home, or they’re taking in a parent, or they need to finally retire.

Instead of running away from his fears, what if he leaned into them? What if he began to use fear as a signal, a call to be curious, or a call to validate his concerns?

He could de-risk his portfolio until he found a set of trade-offs he felt comfortable with. He could keep a multi-year cash buffer. Who cares if it’s not optimal? A good financial plan shouldn’t be based entirely on a spreadsheet. That’s the map. It should be based on their behavior. That’s the terrain.

So if you’re going to worry about something, worry about this: Worry about looking back on your life with regret.

Worry about spending more time with your family and less time in front of a trading screen.

Worry about maximizing experiences with the people you care about. Worry about robbing yourself of enjoying your best years. Most importantly, worry about missing the point of having money in the first place.

I’ll never tell him not to worry. This is his life’s work. I’ll only ask that he worries about the right things.

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