Record-breaking, big outlier events tend to move the needle the most in the economy and stock market.* Note the word, “outlier.” Outlier events typically are surprises and are indeed unlikely. In his beyond excellent book The Psychology of Money author Morgan Housel lists five events that were outliers with world-changing consequences:
- The Great Depression
- World War II
- The dot-com bubble
- September 11th
- The housing crash of the mid-2000’s.
A conclusion could be drawn from the book’s chapter titled, “Surprise!” that surprises are perhaps the most reliable thing going. But the irony of the reliability of surprises is we do not know what the surprise is until after it has unfolded.
Therefore, what can be done to insulate portfolios – and lives – from surprise, especially negative surprises?? The simple answer is (the title of the next chapter), “Room for Error.” Making room for error can be as simple as having a sufficient emergency fund, or more complicated as in having a “Plan B” and “Plan C” – or being OK with starting completely from scratch – if “Plan A” does not work out. Here is where paranoia comes in.
Pure paranoia can be characterized by obsessive or irrational suspiciousness. But a milder form of paranoia can be a healthy suspiciousness, or awareness, of the fact that surprises will happen. In this case, a little bit of paranoia can protect a portfolio or life in general from being irreparably damaged. An awareness or suspicion that an unlikely event (say, a health or family emergency) will happen can be the inspiration to create and protect an emergency fund or rainy-day fund. Similarly, for a business owner or founder, knowing that goals may take longer to accomplish means having adequate reserves for maintaining outstanding credit lines or business loans.
Finally, closer to home, for those working on small and large construction or landscaping projects, it is hardly surprising or unlikely that stated “deadlines” will not be met; and therefore, money buffers need to be in place for inevitable timing “surprises” and expenses. A bit of healthy paranoia can provide ample room for error, and ultimately more enjoyment in the long run.
*Used with expressed permission from the author. Housel, Morgan. 2020. The Psychology of Money. Harriman House Ltd.