Focus on Consequences, Not Probabilities with Mark Biller

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It's usually smarter to weigh consequences rather than chase possibilities. I am Rob West. Whether you're building a portfolio or mulling over a new job prospect, checking the odds of success matters. But what if even a low odds failure could wipe you out? Today, Mark Biller joins us to talk through how to guard against the kind of events that can ruin a financial plan and more.

And then it's on to your calls at 800-525-7000. This is Faith in Finance, biblical wisdom for your financial journey.

Well, our guest Mark Biller is executive editor at Soundmind Investing and underwriter of this program. Mark, always great to have you here. Welcome back.

Well, it's great to be back. Thanks, Rob. Mark, you have a terrific editorial called Focus on Consequences, Not Probabilities in the latest issue of Sound Mind Investing.

So talk to us about why that idea matters so much. Yeah, you know, risk-taking is inevitable in investing and in life, but we never want to take risks that we don't have to take. Probabilities deal with how likely something is to happen, but consequences deal with how bad it might be if it does happen. And that's a really important difference. You know, if somebody tells you there's a 99% chance you're going to be successful at something, you think, well, that's great.

That's the probability. And in this case, it's obviously really likely. But what if the 1% chance of failure means you're dead? You know, a 1% chance of ruin is still ruin.

So while the probability may be low, the consequence can be so severe that it should weigh much more heavily in our decision making than the 99% chance of success. Oh, makes so much sense, Mark. And you use a vivid example about crossing a busy street.

So talk us through that. Yeah, we're trying to hit the nail right on the head here, Rob.

So, this is a classic example of a low probability but high consequence.

So, the probability of getting hit by a car is obviously low, but you're hopefully still going to look both ways because the consequence of getting flattened by a truck is catastrophic. And in the same way, investors shouldn't ignore a small probability of a wipeout type of event just because it's statistically unlikely. Yeah, and let's apply that to the real world of investing. Do you have an example? I do.

So, probably the most famous example of this is the failure of long-term capital management, which was a really famous hedge fund back in 1998. The reason it's so compelling a story is that the brain trust behind this particular fund was just loaded with investing legends, the biggest names in the field. In fact, the famous book that followed after this episode was titled When Genius Failed. And the short version of the story, Rob, is these were the smartest guys in the room. They built these amazing mathematical models that would have worked almost all the time, but they got hit by the age-old combination of leverage and just the wrong circumstances that ended up wiping out the whole fund and, depending on who you believe, almost took down the whole financial system with them.

So, that was just a classic investing example of low probability. but high consequence. And really, if you read much financial history, investing history, there are way too many of these examples over time, which really should make us humble about just how low the probability of these types of failures actually is. Yeah, that's exactly right. And the article leans on the late Peter Bernstein's work.

What was his key insight, Mark? Yeah, so Bernstein said the consequences of being wrong are more important than the probabilities of being right. Very simple framework, but really important. And he urged investors to ask, because of that, if it goes wrong, How wrong could it go, and how much will it matter? And with that single question, he really reframes risk from math, the probabilities, to survival, which is the consequence.

Wow. Yeah, this is a really important conversation for everyone listening today who is an investor or will plan to invest someday. Mark Biller with us. We're talking about consequences, not probabilities. When we come back, we'll talk about something called the sequence of returns risk for retirees.

We'll also talk about how much is the appropriate level of risk for you, or at least how you should think through that. And we'll continue to dive further into this article. If you'd like to check it out, you'll read the full editorial at soundmindinvesting.org. Just look for focus on consequences, not probabilities. Back with much more right after this.

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NMLS number 39179. For licensing information, visit nmlsconsumeraccess.org. It's usually smarter to weigh consequences rather than chase probabilities. That's the focus of our conversation today with our friend Mark Biller. He's executive editor at Sound Mind Investing.

You'll find this article when you head to their website, soundmindinvesting.org. It's free and available for you. Again, it's called Focus on Consequences, Not Probabilities. We talked before the break, Mark, about Peter Bernstein's work. Just remind us of his big idea, and then I want you to take that theoretical idea and apply it to the practical and talk about something called margin of safety.

Yeah, sure.

So Bernstein said the consequences of being wrong are more important than the probabilities of being right. And as we apply that to building a portfolio and doing our own investing, We've got to start with this idea of margin of safety. And thankfully, this is where we can lean on timeless biblical principles to help keep us safe.

So, we start with the financial foundation that you and I, Rob, often discuss, which we build that foundation by getting out of debt and establishing an emergency savings reserve before we start to take risks with our money in the markets.

Now, once we do get to that investing stage, then we diversify across asset classes to manage risk. We avoid concentrated bets and leverage that could permanently impair our capital.

So maintaining a margin of safety, at least as we're talking about it here, is really having the humility to acknowledge that we're fallible and leaving room for error in our planning instead of running every scenario at full throttle. Yeah. Let's unpack this around one of the key principles we talk about a lot, and that is an emergency fund.

Sometimes that feels like a totally separate thing from a person's investing portfolio, but they are related, right? Oh, they absolutely are. And it does feel disjointed because you're talking really about savings on the one hand with the emergency fund and investing with your portfolio on the other. But I think the way to think about this, Rob, is think about finding a spot to put a ladder on the ground before you climb up that ladder. The ladder is your investing portfolio, and the higher you get, the more unstable it feels.

So you really want to carefully select a stable, flat foundation for the base of that ladder so the ladder doesn't slip out from under you.

So the emergency fund is that foundation, it's ground zero of your consequence management. The emergency fund is what prevents ordinary life surprises, like your furnace breaking down or your car not lasting as long as you expected, from forcing you to sell your long-term investments at the worst possible moment when the market's down 30 or 40 percent.

So, you can think of the emergency fund kind of as the moat that protects the rest of the castle. Oh yeah, that's really helpful. And you could see that direct correlation to your investments. We talk about something for retirees in particular, and it's a term called sequence of returns risk. Define that for us and then talk to our listeners about how they should handle that.

Yeah, it's a fancy term for a very real potential problem, which is that losses early in a person's retirement can deplete a portfolio so quickly because they're also taking withdrawals from their portfolio that even if you get strong returns later on, it may not necessarily make up for those early losses.

So it's the timing of the losses. You know, you're going to have losses at some point, but if they come right away in the retirement, that can be really difficult. And that's one reason why diversification is so important.

So your whole portfolio isn't fully exposed to that market risk. There are other strategies to help with this specific risk as well. One such example is holding a few years' worth of spending, your budgetary spending, in either cash or very low-risk bonds, specifically so that if you do run into those bad markets, Markets early in retirement, it doesn't wreck your whole retirement plan. Yeah, that's helpful. Let's make that a bit more practical.

So, how can listeners test whether a risk is acceptable or not? Yeah, I think the way to do it, Rob, is you want to focus on the worst case scenario first.

Now, this doesn't mean that you never accept risk. That's just unrealistic. But if you start by looking at least at the worst case scenario, then if the loss would derail your goals or cause you sleepless nights, it's a risk you probably can't afford, even if the probability of success seems good overall.

Now, on the other hand, if you look squarely at that worst-case scenario and the downside seems reasonable, well, at that point, that's when you can put more weight on the probability of the thing being successful. Yeah. Uh your article mentions a variation of Pascal's wager. I'd love for you to give us the quick version and then show how it applies to investing. This is an important idea.

Yeah, so Pascal's wager is a seventeenth-century thought experiment from this French mathematician, philosopher Blaise Pascal. And he argued that since none of us can be certain whether God exists. The safer bet is to live as though he does. And the reason for that is: if you're right and God does exist, the gain is infinite. You get eternal life.

And if you're wrong and there is no God, the cost is minimal. Obviously, you flip that around. It goes the other way. If there is a God and you've bet that there isn't, the cost is infinite. That's kind of what we're talking about, the consequence being so much more important.

So, to summarize that, in other words, when an outcome is uncertain, you need to weigh the potential consequences, not just the odds. And by giving more weight to what could go wrong, we give ourselves plenty of margin to stay on track, even if we end up being surprised. Oh, yeah, that's helpful. And let's settle Pascal's question: there is a God, and He sent His Son Jesus to pay the penalty for our sins so that through His shed blood, we could, in fact, have eternal life. All right.

So, how can someone gauge their personal risk tolerance through that lens of consequences? Yeah, well, again, we want to start with the idea: what if this doesn't turn out the way I expect it to? What's going to be the impact on me? If it does go wrong, how wrong could it go, and how much will it matter to me? You know, that's the reason to, for example, continue owning some bonds, even if you might not really like the prospects of bonds right now.

It's also, on the flip side of that, the reason not to get way too conservative in your investments early in retirement. That's because while you may not think that you living a long life and inflation being high may not be a super high probability, it's also not a zero probability.

So, we've got to keep part of the portfolio growing to keep up with inflation.

So, as we consider all these different types of possibilities and considering the unlikely but still possible things that could happen and the consequences, that's a good way to determine whether various risks are acceptable. Yeah, fascinating conversation. Folks, you're going to want to read this article when you head to soundmindinvesting.org. Just look for focus on consequences, not probabilities. Mark, thanks for your time today.

Always a pleasure, Rob. That's Mark Biller. He's executive editor at Soundmind Investing. Again, the website soundmindinvesting.org. Back with your questions after this.

So call right now, 800-525-7000. Or if you'd prefer to email your question, send it to us at askrob at faithfy.com. Stick around. Are you feeling overwhelmed by credit card debt? As followers of Christ, we are called to be good stewards of what God has given us.

That's why our trusted partner, Christian Credit Counselors, is here to help. Their debt management program can help you pay off your debt 80% faster while honoring your commitments in full. Take the first step toward financial freedom today. Visit faithby.com/slash ccc or call 800-557-1985. Yeah.

Faith in Finance is grateful for support from Sound Mind Investing. For more than 30 years, they've offered financial wisdom for living well. SMI provides step-by-step guidance for do-it-yourself investors. from those just getting started to those getting ready for retirement. More information, including the short video webinar on profit and peace of mind no matter what's happening in the market, is available at soundmindinvesting.org.

Great to have you with us today on Faith and Finance. We're taking your calls today. We've got just one line open: 800-525-7000. Let's head to Tennessee Victor. How can I help?

Hey uh Rob, I appreciate you taking the call. Uh my son and daughter-in-law are. They've got a car payment that's just overly inflated and I was just curious if like Christian credit counselors or if there was another way um you know, the sort of bring down the interest because They had bad credit before they got the car, but they had to have the car. My son joined the military and he needed a car to drive across the country.

So Yeah, I know that can be challenging. That's one of the big three budget busters, housing, cars and food. Food's a little easier to remedy. Houses are really difficult. Cars can certainly be difficult as well.

Is he upside down on this? Or are they just struggling to make the payments?

Well, so now that he's In the military. The money's okay, uh, they live on base, they have base housing and so on, but the Obviously, they're still stuck with this car payment because they bought the vehicle.

So it's nine hundred and something dollars a month. And I'm pretty sure the interest is like way overly inflated because like I said they had not great credit when they got it. But he had to have a vehicle to get him across the country to his duty station.

So. I I just I didn't know if there was a way to You know, get the interest down, sort of like they do with credit cards. I didn't know if there was something for auto loans. like that. Yeah, it's a good question.

No, there really isn't. I mean, Christian Credit Counselors helps people with unsecured debt. And the benefit is that these credit card companies all have a credit counseling department.

So it's an official program that's in place. They all have their credit counseling rate.

So as long as you go through a nonprofit credit counseling agency, they'll slide you into credit counseling. The card gets closed, but you do then enjoy the lower interest rates as long as you pay through the nonprofit. That is not available for secured loans in the same way.

So unfortunately, that option doesn't exist. You know, typically what you would do is just call the lender. You certainly, if you're going to miss a payment, you don't want to wait. You want to ask whether they have a hardship assistance program or temporary payment reduction or loan modification. You know, that's not really helping necessarily.

It's just kind of kicking the can down the road. You could look to refinance. You could, of course, sell the vehicle if it's worth enough to pay off the loan and then just be out from under it, purchase something less expensive. If you're upside down, you can talk to the lender about your options.

Sometimes they'll help you with that. But you always want to start with the budget, you know, so we don't get back into another bad situation. But unfortunately, there's not. Kind of a program you can slide into that would address the interest rates in the same way that you have available with credit cards. Yeah.

I wasn't sure, like I said, they're okay as far as the money situation. I just hate seeing them pay all this money onto this car, but you know, they they're sort of stuck with. I mean, I guess they could again, try to sell it or whatever, but They sort of need it. And under the circumstances, I just didn't want them to keep chucking money at this thing if they keep get, you know, a better offer another way, but outside of uh you know, I guess refinancing, but We talked to the lender on that and the only real refinance on that is not really so much a dropping of the interest, it's just changing the the length of the loan so that it it just changes for longer, you it lowers your monthly bill, but it you're just still paying the the money just over a longer period of time. That's Yeah, which means you pay more interest in the long run.

So, yeah, that's definitely not solving the problem. Yeah, unfortunately, I think you just got to chalk this up to a learning experience and let them just ride this out, pay it off as quick as they can, and try to move on and remedy the situation in the future. Hopefully, they can keep making this payment to themselves once this is paid off, become their own bank and buy with cash in the future. But there's not any kind of quick fix there for sure. Hey, we appreciate your call.

You sound like a great dad, Victor. I wish I had a better solution for you, but I think this is about the best you can do. Hey, stay on the line. I'm going to send you a copy of Ron Blue's book, Master Your Money, to pass along to your son and daughter-in-law. It was a game changer for me coming out of college, and this could be a key learning opportunity for them to understand God's way of handling money.

Again, it's called Master Your Money, and we'll send it as our gift.

So, just hang right there. Thanks for being on the program today. Let's go to Ohio. Hi, James. How can I help, sir?

Hi, Lob. Thanks for taking my call. Sure. Yeah, I'm working and I'm married. Will be at full retirement age at the end of the towards the end of the year.

And I just wonder if I should. Took my Social Security at basically 67 and you know, save and invest and do things charitable, things like that. Or Just keep working and keeping my budget on track, but getting that higher income down the road from Social Security. Yeah, yeah. It's a good question, and it's one that a lot of people really wrestle with.

And the reason that I think for people who are healthy, I mean, obviously, the Lord knows whether we'll take our next breath, but just kind of stepping back for a second, if you're relatively healthy. And you don't need the money because you're continuing to work and probably finding a lot of enjoyment in that. The idea that you would continue to let that increase by 8% a year up until 70 is something that's pretty attractive. Because you could get a benefit that's somewhere between twenty five and thirty two percent higher.

So if your full retirement age benefit, let's say, was $2,500 a month, I mean, you could be talking about a check $3,100 to $3,300 a month. Starting at age seventy.

Now you would need to live into your mid-80s. You know, in order to be paid back for everything you gave up, and then you'd have that higher, you know, payout for the rest of your life. You know, so I think, you know, you could end up with if you live to age ninety, you could uh delaying could result in an additional hundred thousand dollars or more in lifetime payments. Know just by waiting and getting that higher check. And so that guaranteed increase is nice because we certainly don't have any guarantees in the market if you were to take it.

Now, at the same time, what I would say is: if you're saying, listen, I'd rather get that money into work into God's economy right now and give it away and do some things that I really, you know, I'm passionate and burdened about, and I don't want to have to wait. And I don't know how long the Lord's going to tarry, and I certainly don't know how long He's got for me here. I wouldn't argue with that one bit. I would say go for it. But I think if we just purely look at the math equation, I think those are the reasons why a lot of people decide to wait to avoid unnecessary taxation while you're still earning a salary because a higher percentage of your Social Security could be taxable to increase your benefit and to increase your survivor benefit if you're married.

Does that make sense? Yep, that's great. I appreciate it. Thank you. All right, James.

Lord bless you, sir. We appreciate you calling today. Hey, thanks for being along with us today, folks. Remember, we want God to be your ultimate treasure and money, a tool to accomplish His purposes. On behalf of my team today, Jim Henry, Devin Patrick, and Robert Youngblood, I'm Rob West.

We're so thankful you were with us today. Come back and join us tomorrow. We'll see you then. Bye-bye. Faith in Finance is provided by FaithFi and listeners like you.