Why assumptions are killing your financial progress
At a recent family dinner, a close relative who had just returned from a lengthy stay in the United States dropped a bombshell.
“Barack Obama is a racist.”
I nearly choked on my lamb ribs (delicious by the way).
I paused for a moment and settled myself before doing my best to respond objectively. I simply asked, ‘I’m intrigued, what makes you say that?’
‘Well…’ they said, starting with their story.
“I met a high ranking security guard in Arizona. He’s very high up, a highly intelligent guy. He was telling me that Barack Obama had attended the funeral of an African-American man who was shot by police. This man was a convicted criminal and Obama went to his funeral!”
“Then, during the same week, a white policeman was shot dead by a protester and Obama didn’t go to his funeral!”
I paused again.
‘Based on this story, you’re telling me that Obama is a racist?’ I asked.
“Well, I’m not saying that he’s a racist… but he could be!”
Now, let’s step back and analyze the situation.
For starters, they don’t even know the guy that told the story. Do they have an understanding of his own personal political and social preferences? (I’d suggest that this could be important). Did they use the security guard’s story as a prompt to do their own research on the President’s character or policies? Did they even consider that the President is a pretty busy guy? He’s got a pretty heavy schedule that doesn’t necessarily mean he can be everywhere he’d like to at the one time.
The answer to all these questions is no.
This is what we do when we make assumptions.
We get a few pieces of the puzzle and we fill in all the blanks ourselves. We don’t even recognise that we’re making assumptions. We prefer to think of them more like ‘facts’. By definition, an assumption is defined as ‘a thing that is accepted as true or as certain to happen, without proof.’
In this case, they’ve simply accepted a short story about the President as being true, based on a staggeringly incomplete set of information and an opinion that’s credibility is highly questionable.
So, what will they do now?
Chances are they’ll seek out information that reinforces their assumption. Whether it’s in their interpretation of the news, maybe over-analysing Obama’s future actions or choosing to not question the views of someone with a similar opinion. This will all be done subconsciously; they won’t even know that they’re doing it. They don’t even know that they’ve made an assumption! An assumption that is actually based on someone else’s assumption (so many assumptions, it’s hard to keep up).
They shouldn’t feel too bad though. We all make assumptions. Everyday.
Why do we make assumptions?
They save us time. We don’t have to do all the research nor do we need to challenge our own thinking. Life seems easier this way.
What do we make assumptions about?
Pretty much everything.
What does this story have to do with your finances?
Assumptions are killing your financial progress. Make no mistake. They are killing your financial progress.
They’re probably costing you the best chance of achieving your goals. This meant mean future travel, early retirement, a holiday home, starting a business or having more time and freedom to do the things you love. At the very least, your assumptions will be robbing you of peace of mind and a sense of confidence and control. Why? They cause you to make uninformed decisions that create roadblocks, slow progress and have you missing valuable opportunities.
We hear false assumptions all the time. These assumptions are most common in the initial meetings with new clients. Here’s a few:
“I’ve moved my investments to cash because they are safe.” – not if you want to be financially independent in future years, it’s potentially the riskiest investment available to you.
“My accountant would let me know if there were other ways for me to save tax.” – said by a client who was paying an additional $7,500 per annum in unnecessary tax by not seizing available strategies.
“I don’t like superannuation, I think it’s a bad investment.” – superannuation is not an investment; it’s a tax-effective savings environment. The way you choose to invest inside and outside super is almost identical.
“The share market is too risky. I have a friend who lost a lot of money.” – Their friend sold all their shares at the lows of the GFC when they got nervous and emotional. They’ve missed out on the 80% recovery since.
“I wouldn’t be eligible for an age pension as I have too many assets.” – said by a client who had missed out on more than $200,000 in pension payments since retirement many years earlier.
You get the idea.
If I had a penny for every time I’ve heard that……”I never knew that.”
Unfortunately, we’re generally incapable of realising the inaccuracies in our assumptions or cost of our decisions that result. How could we? We don’t know what we don’t know.
(Has there ever been a truer statement?)
Instead, we’re so focused on ‘what we know’ yet sadly what we know is very little (as shown below).
Making great financial decisions ‘based on what we know’ doesn’t work well.
Consider that you’ve got a long car ride planned but only have twenty percent of the map. Without sourcing the complete map which points out the hidden short cuts, dead ends and preferred routes it’s likely to be a challenging journey – worse still, you may not ever arrive. It’s the exact same when you’re investing. Relying simply on your own set of generally limited experiences, knowledge will mean that your journey is also a challenging one.
Your financial future is too valuable to leave to a set of assumptions because what you do with your finances matter greatly. The life you want to live, full of the experiences you desire hinges on the financial decisions you make and the assumptions you don’t.