I Know This For Sure?
Even Our Memories?
I am reminded, again and again, that I know nothing, for sure. Just when I think I have something figured out, I am presented with a new fact or occurrence that casts doubt on what I thought I knew.
And this doesn’t only happen with trivial things. It also happens with significant items that have major impacts on my life. As an example, the other day I had a slight disagreement with my sister about something that had happened when we were kids. Without getting into details, I had carried a hint of resentment towards my father for over 40 years because of something I thought had happened when I was 8.
As I was talking with my sister about it, she interrupted me to say that it hadn’t happened that way. Her and my memories of the same event were radically different, but I was sure that my memory was correct and she was mistaken. We called our brother to see who was right and he had a different recollection than either of us!
It turns out, even our memories aren’t 100% accurate and they can change over time as our brains modify them without our conscious intention.
Most Effective Approach
If we can’t even trust our memories, what can we know for sure to be true? As it turns out, not much. And as it further turns out, that’s a good thing, as long as we’re aware of it.
If you read Annie Duke’s (Annie is a world champion poker player who has become an influential speaker and consultant advising people on how to make better decisions) book, Thinking in Bets, and I highly recommend you do, you’ll learn the most effective decision- making process is to rank potential outcomes by percentage probabilities rather than assigning a binary outcome to them. In other words, when considering possible futures, learn to think about how likely it is that any one of them will come true rather than just whether or not it will come true.
This approach forces you to analyze the possibilities beyond just making a coin-flip decision of this or that. Further, as you start thinking like this, you automatically start making more risk- adjusted decisions and invest less of your ego in your decisions being “right.” In Annie Duke’s view, the most powerful and truthful and honest answer to most, if not all, questions is, “I’m not sure.”
Don’t Fear Being Wrong
For example, rather than making a prediction that the stock market will be up, or down, a year from now and investing accordingly, you could assign a probability to each of four scenarios:
1. Stock market will be up >10% – probability 14%
2. Stock market will be up 0-10% – probability 35%
3. Stock market will be down 0 – 10% – probability 41%
4. Stock market will be down >10% – probability 10%
For now, let’s not get bogged down with the details of how you came to these probabilities.
Based on this analysis, you can now make a more informed decision about how to allocate your investments based on your risk tolerance. Chances are you won’t be 100% correct with your analysis of probabilities, but because you haven’t invested your ego in being right or jeopardized your future with a hit or miss portfolio, you don’t have to live in fear of being wrong.
Adjust As You Go
Expanding on this concept, your decisions don’t have to, and shouldn’t be, made once at some arbitrary point in time and then forgotten about. Instead, you can constantly update your predictions taking into account new information as it becomes available.
Building on the example above, let’s say on January 1st, you made your predictions about the market for the coming year and invested accordingly. By the end of January, let’s say the market has advanced 10%. Do you just sit back and let things unfold until next January 1st when you make another decision about how to invest for the subsequent year?
You could…or you could reassess the probabilities of the four potential outcomes for the next 12 months, and adjust your investment allocation according to your updated analysis.
What Are You Not Sure About and Are You Mature Enough to Admit It?
So, it’s time for a bit of self-reflection. Consider the way you currently make decisions. Do you take a black or white approach, and then place your bets accordingly because you’re afraid to admit that you don’t know or aren’t sure? How do you then deal with things turning out not as expected?
Or are you comfortable enough to simply admit, “I’m not sure, but I predict the following probably outcomes and will act accordingly.”
Perhaps, like most of us, your answer varies across different parts of your life.
Is It Time to Take Action With Respect to Your Investments?
We hope this post may have triggered some reflection about your investments and your current investment counselor, if you work with one. Are you or they adjusting your investments on an ongoing basis to reflect updated outlooks on the world, and keep your portfolio invested appropriately for your return needs and risk acceptance?
If you’re not already a client of Northern Lights Capital, click here and set up an introductory call today to discuss how we can help you manage your portfolio as the institutions do. Or, if you’re not yet ready for that step and want to learn more, download our E-Book “Institutional Investing Illuminated” and sign up for our newsletter to stay in touch.
DISCLAIMER: Northern Lights Capital is a tradename of Aligned Capital Partners Inc. (ACPI). Arpad Komjathy is an agent of ACPI and he is registered to advise clients resident in the provinces of Ontario and British Columbia.
This article is for general information only and is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please consult the appropriate professional depending on your particular circumstances. This article does not constitute an offer or solicitation in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it is unlawful to make such offer or solicitation.
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