Unknown unknowns

I’ve had a lot of trouble thinking about investing these past few days. In the past 15 years or so I’ve traveled to and done business in Japan many a time. I have many friends there. My wife and I have enjoyed some great vacations there. I even experienced a 7.0 magnitude earthquake there in 1996 on the 23rd floor of the Century Hyatt in Shinjuku. My thoughts and prayers go out to all the Japanese people.

Today a post caught my eye regarding the Japan quake and tail risk in investing, the very small probability but large impact event, that really resonated with me. From the post:

More generally, we cannot defend ourselves against even all the potential threats we are aware of or suspect. Such protection could only come at unconscionable cost. Do you want to avoid accidental death?: Don’t drive, or cross the street, or use a gas stove, or live on a planet subject to earthquakes, tsunamis, and the occasional killer asteroid. The analogy is exact with our polity and economy, too. Every good and financial return we enjoy is associated with a host of risks, many of which, in the assumed unlikely event they occur, would cause most of us to question why we wanted them in the first place. And those are the ones we know about.

No, tail risk and periodic resulting disasters cannot be fully avoided or even reduced at tolerable cost. The existence and ineluctability of tail risk should teach us two things: radical humility, and the imperative to live life now, while it is still in our grasp. (emphasis mine)

This is important to remember in retirement or retirement planning. You can run as many numbers as you want, use the fanciest statistical models, or history going back to whenever but there are unkown unkowns that you just can’t plan for. And focusing too much on planning for and avoiding the unknowable is futile and a risk in and of itself. You risk not enjoying your life.

All this brought home why my wife and I chose to do what we did, retire in our early 40s, move into our RV, and travel the country. Yes, we are taking more risk retiring early and having to rely on our investments to carry us through the next 50 years. But there was also a risk in continuing our work lives and postponing our dreams into the future when hopefully we would be able to pursue them, bar some unforseen tail event. For us, we decided that risk was too big. So, we took the leap.

So, go ahead make the best plan you can, run your retirement numbers, but don’t be paralyzed by the unkown unkowns. Stay flexible and most importantly, as they say, carpe diem!

Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.

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2 Responses to Unknown unknowns

  1. Doug says:

    Thanks for the great post Paul. You are so right about our attitude towards the markets and life in general

    I too chose to retire early (not as early as you my friend) at the age of 52 which was in 2004. Soon after the markets dealt us all a bad hand. But I have used the time since then (wisely I hope) to develop a strategy that I think will stand the test of time.

    Thanks again and again for the effort you are putting into the blog. You are providing sound ideas with a reasoned approach that are really helping me stay focused in these recently tumultuous market times.

    Keep up the good work!…(and the same to your wife on the RV blog which I check into as well.) 🙂

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