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Catastrophe Thinking and Taking Doomsday Thinking to the End

October 20, 2022

As I have communicated in other blog posts and writings, I love so much about financial planning. It is my professional calling in life. One of the areas that I particularly love is behavioral finance which is essentially the psychology of money and why we make the decisions we do as people. I really am fascinated by neuroscience and the way our minds work. Our mind is both remarkable in its capacity for thinking and innovation but it is also fascinating with all the glitches in our system that we all have with irrationalities, biases, limits on perspective, and other things that hold us back.

One of the main things in our mental make-up, simplistically stated is that we are driven to do one of two things: seek pleasure or avoid pain (I personally don’t think we are as simple as this but it can be useful to understand our decision making). Avoiding pain is a big part of who we are. There are those who say our evolutionary biology over the years has kept us alive. The proverbial fight or flight mechanism in us. We need some apparatus that distinguishes between real threats and when there is no danger. The world has dangers and threats in them and we have to have something that tells us this. However, this apparatus is not 100% accurate and can cause us to fear things that aren’t really threats.

Which leads us to our current bear market. Right now, we are in the midst of a brutal bear market where different stock markets have been down over 20-30% and bond indexes are down 10-15% as the Federal Reserve has aggressively raised interest rates to combat inflation. 

We have seen clients look at statements and see their accounts go down and extrapolate that percentage in a certain period of time will result in their investments going to $0. There are so many things I will discuss with them, such as possibility versus probability, explaining the pyramid of risk, or explaining the specific investments they have like the S&P 500 and that for their investment to go to $0, the top 500 companies in the U.S. such as Amazon, Coca-Cola, Pfizer, Google, Ford, McDonald’s, Home Depot, JP Morgan, Chase, United Health, etc. would all have to go bankrupt simultaneously. If that happens we have much bigger problems then the value of our portfolio.

Nevertheless, I want to expound more on this catastrophic and doomsday thinking. If a person starts to spiral down the path that the U.S. and the world is irrevocably screwed and its all doomsday (Please understand I am not minimizing long-term concerns particularly with debt, deficits, etc.), you have to follow the path to a conclusion. 

If you think that the U.S. as a country and financial system is going to collapse, then taking one’s money and having it in “safe” investments of cash either in paper form or having it in the bank would ultimately not be safe. Many people love FDIC protection but having FDIC protection only protects you, if you believe we have a stable financial system (one bank can fail and still be back stopped but you could not have all of them fail at the same time) and that the U.S. government can back stop that or become the lender of last resort. 

At that point, if you do not feel that U.S. could do that, where in the world would you put your money to be ultimately safe? And to believe that gold or precious metals can be a suitable alternative, they too have a whole host of limitations as well, the most pressing is that they are not as convenient method of payment as cash. Cryptocurrency? Well we are seeing too that has its challenges.

I do not say all of this to depress you or even scare you. If one allows their thinking to be catastrophic or doomsday, then really there is no place that is ultimately safe. I read a book in last several years about the history of money. One thing that hit me is that money is ultimately trust. Think of US currency, a $100 bill or a "Benjamin". What makes it valuable? It is not the actual paper that makes it valuable. It is the trust we have that it has value based on the support it has from the backing of the U.S. government and it has a universal value that is recognized as means of payment between institutions. If this did not exist, the individual $100 bill would have no value. 

At the end of the day, there is a certain amount of trust or faith that we have in our system. If we don’t, then really there is virtually no place where one could put their money as a safe place. 

As always, we are here to talk and be a resource for you.