Many aspects of our lives involve factors within our control and elements of luck or randomness. In situations involving a high degree of chance, such as health and investing, we have to very careful how we interpret outcomes.
I’ve spent a lot of time over the last year with a book called Outlive, by Peter Attia. The book is all about longevity, and something he refers to as “health span” – not just extending life but extending the time we are healthy and active.
He spends part of the book discussing centenarians and some famous people who lived to “extreme” old age. Some of these people are purported to have engaged in well-known unhealthy activities, like smoking, their entire lives. He asks, what are we to make of this? Does this mean we should follow their lifestyle to a T?
The reality is, in health, as in life in general, there is a lot of luck involved.
This concept was driven home personally for me in 2020 when we lost my dad at just 56 years old. He came from a long line of men with heart disease. Because of this, he tried to stay active and maintain a healthy weight, and he never smoked or consumed alcohol. Despite these efforts and his overall good health, he had a rare response to and ultimately died from COVID-19.
Sometimes good decisions have bad results and sometimes bad decisions end up okay.
It may seem obvious that just because someone smokes and lives a long life that doesn’t mean smoking is the key to health. But I see people make this mistake all the time in other areas of life. Consider this example:
If you buy term life insurance and live past the end of the term, does that mean you wasted all the money you paid to the insurance company? No way! That insurance protected your loved ones when you needed it – when your death would have been a significant financial challenge for them. Buying the insurance was still the right decision, even though with hindsight you know you didn’t need it.
How about this one:
You buy a lottery ticket and win $1,000,000. Was buying the lottery ticket a “good” decision? In this case, it turned out in your favor. But on average, buying lottery tickets is a losing game. Just because you got lucky, doesn’t mean it was a smart idea.
You can probably see where I’m going with this.
We all probably know someone who made a fortune (or at least a small fortune) on a single stock pick or other timely investment. Does the fact that they did so well mean that you should start trying to pick stocks? No. The outcome in their individual case does not necessarily make for a winning investment strategy.
Another prime example of this type of thinking is looking at past performance – seeing the relative winners and losers in our portfolio, and wishing we had avoided the losers.
Why didn’t we hide everything under a mattress in 2022?
Why didn’t we put everything into NASDAQ stocks in 2023?
The list could go on and on. Hindsight is 20/20. Just because NASDAQ stocks outperformed most others in 2023, doesn’t mean a good investment strategy is to put all your money in NASDAQ stocks.
Again, we have to separate the merit of a decision from the outcome in uncertain situations.
There are things we do in investing that are considered “prudent”. Prudence doesn’t mean that in hindsight we won’t ever look back and see there was a better move to make. Prudent investing means taking actions that are likely to lead to good outcomes in the long run.
Prudent investing involves things like selecting investments that have positive expected returns, diversifying, matching your level of risk to your individual needs, and staying disciplined.
My dad’s story is a reminder that good decisions don’t always lead to good outcomes—but they are still worth making. In both health and investing, prudence is not about guaranteeing a specific result. We cannot eliminate uncertainty, but we can refuse to gamble with what matters most.
That’s why our focus is not on chasing the best recent outcome, but on making disciplined, thoughtful decisions that give our clients the highest likelihood of long-term success, even when life—and markets—don’t cooperate.
James is the founder of SwitchPoint Financial Planning and a pioneer of the flat fee movement. He is passionate about challenging long-standing practices in the financial advice industry and refuting misconceptions about investing in an effort to help people make better decisions with their money.