Sweet Emotion (Low Probability)
High-emotion, low-probability topics dominate news headlines and your emotions. And this means it is top of mind and difficult to dismiss.
In the world of private wealth management and financial planning, these are recent, common issues that I would classify as high-emotion, low-probability:
- When this new tax plan is passed, it is going to make me broke
- Stocks could go to zero, so should I be in cash?
Assuming a proposed tax-plan from a president-elect ignores a couple of key points:
- The makeup of the legislative branch of our government that passes new laws
- The reality that concepts proposed are meant to appeal to a constituency. Negotiation between two sides with competing interests means that compromise is always the result.
The likelihood that all talking points of a proposed tax-plan being passed are near zero.
Negotiations between 500 lawmakers will carve out some portion of this proposal and some will remain, not necessarily unaltered.
What about the possibility of stocks going to zero?
Yes. That is technically true. And there are countless examples of individual companies going bankrupt and the stock going to zero.
But if you own a diversified portfolio, with hundreds or thousands of companies, the likelihood of all those firms going bankrupt is slim.
And if it does happen, none of us will be concerned about stock prices.
Your emotions are a powerful driver of your decisions. And when your money is involved, those emotions are even stronger.
That is why it’s always best to have someone to discuss your emotional impulses that affect financial decisions. Weighting the probabilities in your favor will guide you to the best results. Not the fears produced by your emotions.