Many investing strategies seem to ignore the reality of that life – there is always uncertainty. There is no allowance for the unforeseen, and there never will be. So here are some considerations for building room for error that can help you set aside money so that it doesn’t completely derail your budget when something does happen.
Knowing the odds and putting that to your advantage
Like playing blackjack, where you may raise your stakes when your odds of getting a blackjack is higher when getting a sound card and lower when standing, this investing strategy encourages you to take more risks if your odds of getting a good return are higher.
If the market is doing well and there’s room for error, then increase risk by putting money into investments that have high returns and carry high risks such as through stocks or other things like options trading. Ask yourself questions what is the return rate tracking like and how much historical data do I have to prove this?
Humility is your best friend
In the finance world, humility is a critical trait to have. This means being able to step back and accept that the future is unknown. It is more difficult than you think to do this because we live in a very certain world where everything seems predictable and the future can be perfectly forecasted.
Humility also means that sometimes it’s ok to take your lumps when investing. Of course, sometimes things don’t work out, but accepting defeat gracefully with humility will keep you from making mistakes like doubling down on a losing investment.
Use the margin of safety to help you navigate the unknown
Graham’s ‘margin of safety’ suggests that we don’t need things to be black or white, and navigating in the grey area where a range of acceptable potential outcomes is the smartest way to proceed. This is why we see many people opt for ETFs as a long term investment option because it’s a diversified portfolio. They can rest easy knowing that the market will typically trend up, and the winning picks will make up for the losing stocks.
Room for error is underappreciated and misunderstood
People typically perceive backup plans and risk management as a sign of lack of confidence or high risk when it should be the complete opposite. Having backup plans is a sign of confidence because you know that no matter what happens, things will be ok. The number one goal of finance should always be to protect your wealth and keep it safe.
Get well-rounded advice on how to both manage and grow your money
There are a lot of financial planners out there who only understand the basic rules like don’t put all your eggs in one basket, diversify, etc. still, they don’t give you strategies on how to do that successfully because their job is not investing – their job is managing your money.
That’s why it’s essential to not only look for a financial planner but also an investing expert who can help you make more informed decisions with room for error in mind.
Give yourself enough buffer to ride the hardships
Significant gains happen infrequently because they are either rare or take time to compound. So the person with enough room for error in that investing strategy will let them enjoy your hardship in other areas and has the edge over the person who gets wiped out when things go south.
Having enough buffer cash can also help relieve the emotions from investing and allow you to focus on the fundamentals. Don’t be so quick to pull the trigger because you’re excited or scared.
Be conservative in your future return estimations
A good rule of thumb is to estimate the third lower than your current predictions. This is an excellent way to stay in the game when things get tough because it’s not as painful when you overestimate by too much.
In finance, thinking about room for error and planning accordingly will help ensure your success over time no matter how unpredictable investing can be at times.
You don’t need a reason to save
This trick is often overlooked even by the wealthiest. While it’s great that you should plan to save for a car, house, or a holiday, whatever it might be, it is equally essential for you to keep things that you cannot possibly predict. Make a habit out of saving for no reason, and this will help you finance the unforeseen.
There are many finance-related considerations and decisions when it comes down to investing your money. But one thing you can always count on is uncertainty, and the room for error in your strategy should account for this. If you want help with managing or growing your wealth, talk to a financial expert today about how they might be able to make things easier by providing backup plans and risk management techniques. No matter what happens financially over time, having the right strategy will ensure success no matter how unpredictable investing may seem at times.
This blog post was inspired mainly by award-winning author Morgan Housel’s book “The Psychology of Money”, which I would highly recommend to anyone interested in finance.
This article is not in any way financial advice.