In her recent essay “Paradoxes, From Your Coffee to Calculus,” Wall Street Journal columnist Eugenia Cheng describes two paradoxes — being unable to find your glasses because you are not wearing your glasses and deciding whether tolerant people should be tolerant of intolerance. Sound familiar? I think we’ve all been there.
She resolves these for herself by always storing her glasses in the same place and being clear that she can be tolerant of individuals who are intolerant without having to accept their ideas.
There are also some powerful paradoxes in financial planning.
Paradox #1: You need to take more financial risk because you need more money.
Yikes. If you need more money, you can’t afford to take more risk! A basic tenet of financial planning is that if something is a need, i.e., if it is unacceptable to come up short, then it does not make sense to ramp up risk when funding that goal.
For example, if it is unacceptable to not have sufficient cash to pay your child’s tuition bill when it comes due, and you have only one source of college funding, then investing college savings in a stable investment, not stocks, makes sense. You would invest college savings in stocks if you have a second source of college funding you can turn to if stocks are down when tuition comes due, or if you are OK telling your child that a less expensive school is all you are able to finance.
Ditto for retirement savings. You likely have a basic standard of living that you do not want to go below. Savvy investors cover the cost of that need with inflation-protected lifetime income, the “safe” asset for retirement security, reserving stock market risk for remaining portfolio wealth.
Paradox #2: Disclosure is a reasonable way to address financial conflicts of interest.
Really? Even if you do read the fine print (be honest!), disclosures about conflicts of interest can have paradoxical consequences. As financial columnist Jason Zweig observes, when an advisor discloses a conflict, investors may conclude the advisor is being candid, leading them to trust the advisor more. An advisor may also feel biased advice becomes more justifiable once he reveals his conflicts. Ouch — times two. Savvy investors want conflicts minimized, not just disclosed.
As Cheng comments, the presence of paradoxes alerts us to the limits of our own logical thinking and points us in the direction of improving it. Whether it is coffee, tolerance or the management of your personal finances, pausing to ponder paradoxical statements is worth the effort. Perhaps over your next cup of coffee?
Interested in improving how you manage your personal finances? Please contact Paula Hogan at firstname.lastname@example.org.
Originally published: September 25, 2018