Pondering This Philosophical Question Can Be The Ticket To Financial Success
Your plan rides on your (well-considered) opinion. What if you’re wrong?
Reaching your financial goals in the 21st century might depend on how well you heed some advice laid down by 17th century mathematician/philosopher Blaise Pascal.
Pascal was consumed by the choice all humans make to either believe, or not, in the existence of God. His insight was to posit that regardless of whether you believe or not, the rational act is to act as if you believe.
If you believe, live a righteous life and are correct that God indeed exists, you are bound for heaven. If you’re a believer and wrong (God doesn’t exist), no real harm or foul. The same goes for the non-believer: If you lead a righteous life and are wrong – that is, God exists – you’ve still managed to avoid hell.
The crux of Pascal’s Wager is to move past a focus on the probability of one’s belief being right or wrong, and focus instead on the consequence of your belief being wrong.
That same philosophy can wring unnecessary risk out of your financial life. For every decision you make, ask yourself what is the consequence if you are wrong? Is it a risk you are comfortable with, or are you setting up yourself and your family for heartache?
A few examples where Pascal’s Wager can help:
You have a young family, yet no term life insurance. Your belief, based on probability, is that you have decades ahead of you. The odds are indeed in your favor. Yet the consequence of being wrong on this – dying young – can leave your family in a calamitous financial bind. Term life insurance is your insulation.
A key component of your retirement plan is to work through your 60s. This is indeed a very popular expectation among 50-somethings, yet late-stage layoffs, illness or the need to step in as a caregiver often pushes many to stop working sooner than planned, or downshift to work that pays less.
Even if your plan is to keep working, what’s the financial consequence if you can’t? If you’re saving as much as you can today, and have your spending under control, you are going to be in much better shape than if you assume you can run the table and keep the high-powered career job you have in your 50s through your 60s, when you’ll start saving in earnest.
You’ve been a bit too hands-off during this bull market. Buy and hold is a smart strategy for long-term investing, but it still requires some maintenance work. Yet many investors don’t periodically rebalance their portfolio to make sure it remains close to their long-term strategy. Especially in bull markets; it’s hard to sell stocks when they are on a tear.
But oh my, the consequences. Let’s say that your strategy back in 2009, at the start of this bull market, was to have 70% invested in stocks and 30% in bonds. If you’ve just left your portfolio alone, that mix is now 88% bonds and 11% stocks. Are you really up for bearing the consequence of having 88% of your portfolio invested in the stock market today when the next bear market hits?
Moreover, you’re 10 years closer to retirement. Perhaps you want to consider if it’s time to ratchet down the risk in your strategy. If 60/40 is your new goal, you’ve got even more rebalancing to do. The good news is you can buy and sell shares within retirement accounts without any tax bill.