A Little Paranoia Can Be OK

From the 2022 Archives of TGIF 2 Minutes with a few updates…

Record-breaking, big outlier events tend to move the needle to extremes in the economy and stock market. Note the word, “outlier”. Outlier events typically are surprises and are often unlikely. In his beyond excellent book The Psychology of Money* author Morgan Housel lists five events that were outliers over history in the US 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 milder case, a bit of paranoia can protect a portfolio or life in general from being irreparably damaged. 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 and credit lines for maintaining 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 express permission from the author. Housel, Morgan, The Psychology of Money. 2020. Harriman House Ltd.

**Referencing September 11th as a true “outlier event” in the history of outlier events in the United States and globally, it makes sense to pause and recognize that we will #AlwaysRemember those lost on that horrific day in 2001. God bless America and God bless those whose families were affected in the 9/11 tragedy. We remember you today and always.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.

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