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Dichotomy in the Mind
Written by Steve | Published: |
As a teenager my friends and I had a favorite pastime. Whenever it rained in the Phoenix, Arizona valley (which was not often) we would call each other and find an empty parking lot or field and ‘practice’ doing donuts in our cars.
It was always a good time to get that feeling of being out of control but not for too long.
It was fun and immature but what I didn’t realize is that it was actually helping fulfill a human need that lives in all of us.
There is a dichotomy in the mind between two ideals…
Certainty and Variety
Certainty brings us safety and helps prove to our minds that everything is going to be ok. But it could get really boring because we know exactly what we are going to get.
On the opposite side of the spectrum there is variety, where everything is up in the air and every moment is unplanned and full of possibilities.
Living too much on either side of the spectrum creates its own set of problems.
The interesting thing to observe is how different people attempt to balance between these two.
I like to apply these human needs when working with clients on their wealth strategy.
If we apply a strategy that shows us we can get XX% per year no more and no less, that appeals to the certainty side of the brain.
However, if we put it all at risk we may rocket to the moon or may lose it all.
This is where Wall St. has diversification all wrong.
They like to ‘diversify’ between stocks and bonds, large cap, small cap, emerging markets etc. but guess what…
That’s all at risk.
If you have watched your bond portfolio dwindle away this year (along with equities) you know what I am talking about.
Having all your money in risk assets i.e. 401k/stocks/bonds/real estate is like living in the all variety spectrum.
This causes extreme cognitive dissonance making you feel uncomfortable and wondering if you are doing the right thing.
This doesn’t mean that you put all your assets in boring “safe” strategies either.
There is a science to this where you can align your growth and cash flow tolerance to fit your investor DNA.
It’s crazy out there right now. So if you are feeling uneasy let us know if we can help.