Fix It Friday Ep. 23 - The Rearview Mirror Trap: Why Every Crisis Feels Like the Worst One

• Hindsight bias creates the illusion that past events were predictable when they were not
• Every crisis feels uniquely severe in the moment because uncertainty is uncomfortable
• Markets historically recover and reach new highs, despite temporary declines

Disclaimer: [00:00:00] The following podcast by Fusion Family Wealth, LLC Fusion is intended for general information purposes only. No portion of the podcast serves as the receipt of or is a substitute for personalized investment advice from Fusion or any other investment professional of your choosing. Please see additional important disclosure at the end of this podcast.

A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www.fusionfamilywealth.com.

Jonathan Blau: Welcome back to another episode of Fix It Friday edition of the Crazy Wealthy Podcast. Today I'm gonna talk about fixing something that quietly sabotages otherwise good decision making, [00:00:30] especially during moments like this.

It's called hindsight bias, or as I like to call it, I knew it all along. Ida,

Voiceover: welcome to the Crazy Wealthy Podcast with your [00:00:45] host, Jonathan Blau. Whether you're just starting out or are an experienced investor, join Jonathan as. He seeks to illuminate and demystify the complexities of making consistently rational financial decisions under conditions of [00:01:00] uncertainty. He'll chat with professionals from the advice world, entrepreneurs, executives, and more to share fresh perspectives on making sound decisions that maximize your wealth.

And now here's your host.[00:01:15]

Jonathan Blau: Why this crisis feels like one of the worst ever to so many people that I speak to right now, a mid war with Iran and a spike in oil prices. I'm hearing the same refrain over and over again. [00:01:30] This feels different. This feels worse. This might be the worst we've ever seen. Here's the truth. It isn't. That doesn't mean that it's easy.

It doesn't mean that it's not painful. It doesn't mean that it won't take some time to get resolved, [00:01:45] but every crisis feels worse in real time than it looks later. Here's the reason why, because uncertainty is painful. The rear view mirror problem is what we're facing. All past crises lives safely in the rear view mirror.[00:02:00]

We know how they ended. We know how they were resolved. We know markets not only recovered, but went on in almost every case to new all time highs. The reason I say almost every case is because the current one hasn't done that yet to every [00:02:15] other crisis except the current one. The markets have recovered and gone on to new all time highs, so they don't feel that bad anymore.

But at the time, they felt just as uncertain, just as uncomfortable, and just as emotional as today's [00:02:30] hindsight bias convinces us. That we saw it coming. Clarity existed, and the outcomes were obvious, but they weren't. I knew it all along isn't wisdom when someone says, I knew this would happen? What they're [00:02:45] really saying is, I'm forgetting how uncertain this felt before it happened.

If we truly knew, we'd know when it would begin. We'd know how long it would last, and we'd know what would come next. We don't, and that's [00:03:00] okay because successful investing has never acquired prediction. It requires preparedness, emotionally and financially. Preparedness, not prediction. Let's talk about what that actually means.

There's emotional [00:03:15] preparedness, which means investors must understand the true nature of markets, especially stocks since 1980, the s and p 500. Has experienced average entry year declines of about 15%. That means stock investors must be [00:03:30] prepared to watch 15% of their portfolios value appear to disappear every single year for any reason or no reason at all their markets, which are declines of at least 20%.

Occur about once [00:03:45] every five or six years historically, and have declined on average by about 33%. So successful long-term investors must be prepared every five years or so to watch a third of their stock portfolio's value [00:04:00] appear to disappear. To do so without altering their plan. I say appear to disappear because every single market decline again in history has fully recovered and has gone on to new all time highs.

As Charlie Munger, [00:04:15] who's Warren Buffett's partner that has passed away in the last couple of years, put it. The first rule of compounding is to never interrupt it unnecessarily. Anytime we sell out of our stock portfolios 'cause of anything other [00:04:30] than the need for cash and liquidity, we are interrupting compounding unnecessarily and interfering with the likelihood of our financial goals being met.

So what's financial preparedness now that we've talked about? Emotional preparedness. Emotional [00:04:45] discipline only works when the financial structure supports it. That's why roughly two to three years before retirement, we advise investors to allocate two to three years worth of their spending needs into short term bonds or money markets.

This [00:05:00] significantly reduces the probability that they'll have to sell stocks to fund their lifestyle needs while the markets are temporarily down. Why do we recommend two to three years of spending? Because since 1929, stocks have gone from a peak in [00:05:15] their valuations to a trough. Say the average bear market is down 33%.

The recent peak in the s and p 500 was 7,000. So that means it would go roughly to 5,000 at trough levels and then back to new [00:05:30] highs above the 7,000 high in about 40 months on average. So if we have two to three years living expenses, historically, that would've enabled us to have most of our money invested in what protects us against its biggest threat, which is [00:05:45] inflation.

So invested in stocks, and then have the two to three year spending set aside. So that we wouldn't have to interfere with our stock investments during the temporary declines to support our living expenses. Preparedness not prediction is what [00:06:00] protects long-term plans, so what actually works good.

Investment plans have to assume uncertainty, discomfort, and periods that will occur when nothing seems to make sense. They don't rely on being right. They simply [00:06:15] rely on being durable. Durable through volatility. Durable through fear and durable through not knowing, because the defining characteristic of the future is this.

There are no facts about it. Successful investors develop the [00:06:30] ability to make rational decisions under constant conditions of uncertainty. So here's the fix. The next time your brain tells you, this is the worst crisis we've ever seen, and my financial situation is imperiled at a higher level [00:06:45] than it's ever been.

Remind yourself of a few things. Every past crisis felt this way at the time you were going through it. The difference isn't the severity of this crisis, it's resolution. This one has not yet been resolved and all the others have. You [00:07:00] feel calmer about the past only because you know how it ended. The goal isn't to be right in h.

The goal is to have a plan that works before clarity ever arrives. So in closing, I want to remind everyone that hindsight bias is [00:07:15] simply this. An event that looked highly uncertain before it happened, but looks obvious only after it occurred. It creates the illusion that the world is predictable, but understanding the past never gives us the ability to predict the [00:07:30] future.

That illusion of understanding is dangerous. Real wisdom isn't saying I knew it all along, real wisdom is saying, I didn't know and my plan didn't need me to. Fusion's behavioral framework exists for moments just like [00:07:45] these when emotion is high, perceived certainty is low and disciplined decision making matters most to protect and grow well.

I hope you enjoyed this episode of Fix It Friday. If you have friends who seem overly concerned about [00:08:00] today's crisis, please feel free to share this podcast with them. You can always visit, uh crazy wealthy podcast.com and fusion family wealth.com. To access the podcast and all previous ones. You can also find them at all your [00:08:15] favorite podcast venues.

Thanks for listening.

Voiceover: Thank you for tuning into another episode of The Crazy Wealthy Podcast. For more insights, resources, and to sign up for our newsletter, visit [00:08:30] crazy wealthy podcast.com. Until then, stay crazy wealthy.

Disclaimer: The previous podcast by Fusion Family Wealth, LLC Fusion was intended for general information purposes only. No [00:08:45] portion of the podcast serves as the receipt of or is a substitute for personalized investment advice from Fusion or any other investment professional of your choosing. Different types of investments involve varying degrees of risk, and it should not be assumed that future performance of any specific investment or investment strategy or any non-investment related or planning services, discussion or content will be profitable.

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To provide investment advisory services. A copy of Fusion's current written disclosure brochure discussing our advisory services and fees is available upon request or www.fusionfamilywealth.com.