Hi, I'm Kevin. I write a free newsletter about money for 904 other Millennial parents. We talk about how to turn your money into memories.
On August 16, 2008, Mike Deeter hiked into Havasu Canyon with two friends. The weather that day was beautiful. Blue skies draped the canyon walls above. Crystal-clear turquoise waters shimmered before them.
As Mike later described, his group “decided to just spend the day relaxing by [Mooney] falls.” They “took some pictures, played in the water for a few hours.”
During the afternoon, a few light showers quickly turned into heavy rain. But that type of brief, monsoon rain was not uncommon in Arizona during the late summer.
And sure enough, the clouds soon passed. Brilliant sunshine returned.
Only hours later, many campers prepared to go to bed for the night. That’s when they heard a “sound like a freight train.” Screams followed. Mike and his friends turned on their headlamps. Water was rushing through the camp. Tents collapsed, some with people still trapped inside.
A flash flood was surging through Havasu Canyon.
Uncertainty characterizes many aspects of our lives.
Mike Deeter later acknowledged that seeing the banks of the river swell a bit “definitely raised some red flags.” Campers like him regularly hear about flash floods and the risks they pose. But a flash flood happening to him? Today?
“Think about 100-year events. One-hundred-year floods, hurricanes, earthquakes, financial crises, frauds, pandemics, political meltdowns, economic recessions, and so on endlessly. Lots of terrible things can be called ‘100-year events’.
A 100-year event doesn’t mean it happens every 100 years. It means there’s about a 1% chance of it occurring in any given year. That seems low. But when there are hundreds of different independent 100-year events, what are the odds that any one of them will occur in a given year?
Pretty good, in fact.
If next year there’s a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year – or any year – are … uncomfortably high.”
Still, we never exactly know the “what” or the “when.” And faced with this uncertainty, we’d rather not think through how different worst-case scenarios may impact our lives.
Instead, we often end up playing psychological games with ourselves. We try to control things over which we have little influence. Or we fixate on small risks while ignoring those that would most disrupt our future.
We may know the data. We may see others experience bad times, unforeseen events, extreme outcomes. But us? Today?
We just can’t envision ourselves in those same circumstances.
We almost never believe that a flash flood will hit our personal finances, either.
Take, as an easy example, investing in the stock market. Most people expect average outcomes in most years.
Over long time periods, that average, in the U.S. stock market, is about 8-10% on an annual basis. Yet, as author Ben Carlson has explained, the stock market rarely gives us “average” returns in a given year.
“Going back to 1928,” he writes, “there has been one single year of returns that fell between 8% and 10%. Most of the time, the stock market is up big or down big on the year. From 1928-2022, 70% of all years have seen double-digit gains or losses.… The history of the stock market is big gains and big losses with the occasional boring year thrown in for good measure.”
But we never exactly know the “what” or the “when” until we see distressing news headlines.
Faced with this uncertainty, we mostly avoid thinking through potential worst-case financial scenarios for ourselves, too. Instead, we default to the average. Or we fixate instead on relatively minor decisions, such as the cost of our morning coffee.
Ultimately, we choose to act as if our own investments and our own budgets are insulated from bad outcomes.
And when we do so, we’re often left with few options. In Mike Deeter’s case, he and his friends just needed to survive. He later said:
“A group of us found a crack in the canyon wall that we could basically just kind of climb up to a ledge. …about the time we started climbing, we heard that surge rush in again… The ground was shaking beneath our feet. And we could actually hear trees getting ripped out. …There were a lot of people that got cut off from their group. Didn’t know if their friends were safe or dead.”
Mike Deeter and his friends survived that night. In part because, hours earlier, they actually had prepared for the worst.
When a village representative hastily warned the camp about a potential flash flood, many people ignored his guidance. But Mike moved their tent to higher ground.
In our financial lives, higher ground is found in room for error and room for disappointment.
Room for error often feels contrary to our desires. It requires prudence when our financial lives feel stable, easy. But, Morgan Housel writes, it’s not as conservative as it seems:
“When used appropriately it’s the opposite. Room for error lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor.
Since the biggest gains occur the most infrequently – either because they don’t happen often or because they take time to compound – the person with enough room for error in part of their strategy to let them endure hardship in the other part of their strategy has an edge over the person who gets wiped out, game over, insert more tokens, at the first hiccup.”
Room for error requires patience and discipline. After all, the benefits don’t pay off until some unknown future date.
For this reason, room for disappointment serves as an attractive complement. It’s a short-term incentive.
Room for disappointment requires us, during stable financial times, to make financial choices that emphatically reflect our values and priorities. Essentially, we’re countering future hardship with present joy.
Negative financial events can be devastating. They’re certainly stressful. And they can even feel punitive. An expensive one-time cost, for example, can force you to make temporary sacrifices elsewhere. Or consider an extended stock market decline, in which you’re forced to delay plans you had made.
These extreme situations feel even worse when we haven’t been using our money in ways that reflect who we are and what we want out of life. Room for disappointment helps us to more easily accept events that have a low probability, but an outsize impact.
When we create room for disappointment, we’re making the most of those financial outcomes that fall in our favor. Room for disappointment creates memories on which you can lean during much more challenging times.
Several years ago, psychologist Daniel Kahneman noted:
“Whenever we are surprised by something, even if we admit that we made a mistake, we say, ‘Oh I’ll never make that mistake again.’ But, in fact, what you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.”
Mike Deeter sounds like he has learned this lesson. Since the flash flood, he says, “Anytime I’m traveling in the backcountry… [I’m] just keeping my head on a swivel. And if I see anything or hear anything that just says, you know, you need to turn around, I go with that.”
Hi, I’m Kevin. I’m a financial advisor in Washington, DC. I’m also the founder of Illumint, an independent financial planning company in the District that specializes in financial planning for Millennials like you. I empower our generation with the confidence to invest an inheritance, financial gift, or extra savings. If you’re new to Financially Well, welcome – you now have access to the leading finance podcast for Millennials. I encourage you to read, watch, or listen to the ideas I’ve shared about making your money work for you. And then when you’re ready, please send me your thoughts & questions!
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