Not long ago, I ran into my friend Martin, who works as a cardiologist at a local hospital. In the course of our conversation, I commented on the construction equipment outside his facility and asked what they were building.
His answer surprised me: “Building? No, they’re actually un-building.”
He explained that recently his hospital had been sold and that the new owner was a for-profit company. As part of the transition, the new owner had evaluated the hospital’s facilities and discovered that a group of older buildings was mostly in disuse. Unlike the prior owner, though, which was a non-profit, the new owner was subject to real estate taxes and saw no sense in paying taxes on empty buildings. As a result, they determined that it would be worth the expense to take them down.
This story got me thinking about how tricky it can be to make financial decisions. In this case, two different owners of exactly the same buildings came to exactly opposite conclusions simply because of a difference in their tax status. And, while tax considerations get a lot of attention, the reality is that there are a thousand other ways in which each of us is unique — our age, health, children, lifestyle, and much more. Each of these factors must be considered when making financial decisions. At the same time, and paradoxically, with so much information around us — radio, TV, podcasts, blogs and more — it can feel more difficult than ever to filter through it all. As the hospital example illustrates, what works for one person may not work for the next. And yet, when making financial decisions, it is critical to follow only the advice that will work for you.
So how do you do this? How do you separate the signal from the noise, so to speak? While there is no easy answer, I recommend this approach: Whenever you come across financial information and are wondering what to make of it, ask yourself these three questions:
1. Does this information actually matter? On my shelf, I have a book titled Guide to the 50 Economic Indicators That Really Matter. This book is only lightly read, though, and probably ought to be thrown away, since most of their fifty indicators really do not matter. For ordinary people, there is very little relevance, and debatable predictive value, in obscure statistics like the Baltic Dry Index or the Tankan Survey. In fact, I would put recent concerns about trade tariffs into that same category. Yes, this issue matters, but the impact is far from certain. And, if you have a diversified portfolio and take a long-term view, it really shouldn’t cause you to lose sleep. As Einstein once said, “not everything that can be counted counts.”
2. Is this information accurate? In recent years, there has been growing concern in academic circles about a phenomenon called the “replication crisis.” The concern is that it is very difficult to reproduce the results from a large portion of studies published in academic journals. While scholars are still working to understand this, I view it as yet another reminder that you should always think critically about everything you read. Before making financial decisions, always evaluate the credibility and the track record of the source and always look for counter-arguments.
3. Is this information universally-applicable. And if so, does it apply to me? Some advice is nearly universally accepted: Avoid credit card debt, for example, and avoid high-cost investments like annuities. But some advice will apply only in specific cases — to people in certain tax brackets, for example, or to people who hold certain types of investments. So, as you come across financial advice, always ask yourself whether it is generally applicable. If not, ask yourself whether it would apply to you. There are lots of good ideas out there. Just be sure that a given idea will be good for you.
