In his 1929 book The Thing, British philosopher G.K. Chesterton introduced an idea that is now known as “Chesterton’s fence.” Here’s how he explained it.

Imagine two people walking along a road when they discover a fence blocking the way for no apparent reason. As Chesterton tells it, the first person looks at the fence and says: “I don’t see the use of this; let us clear it away.” But the second person disagrees: “If you don’t see the use of it, I certainly won’t let you clear it away.”

Why not remove the fence? The second person explains his reasoning: “Go away and think,” he tells the first person. “Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”

In other words, Chesterton is saying, don’t remove something before understanding why it’s there. Indeed, even when something appears counterproductive—like a fence blocking a road—there’s likely a reason behind it. People don’t construct things for no reason.

Chesterton’s admonition, then, is that we should seek to understand why something exists before deciding to change it. Why is this so important? As Chesterton explains, the key risk in making any change is that it may trigger unintended consequences. Perhaps the most famous example of this phenomenon occurred in China in the late-1950s.

The Communist government at the time decided that sparrows needed to be eradicated because they were damaging crops. A nationwide campaign encouraged citizens to kill sparrows along with other pests. But because birds feed on locusts, the unintended consequence was that the locust population boomed. This resulted in even greater crop damage, triggering a famine that killed an estimated 45 million people.

That’s an extreme example, and to be clear, Chesterton wasn’t arguing we should never make any change at all. He was simply advocating for a more structured approach to decision-making. This idea can certainly be applied to financial decisions. If you’re considering making a change, these are five questions you might ask:

1. Urgency. A key challenge in making financial decisions is that, more often than not, the questions aren’t simple. Suppose you’re considering a change to your portfolio’s asset allocation. A single change could have at least three effects: If you’re making the change in a taxable account, it might generate a capital gain or loss. A shift in your asset allocation might also change the growth trajectory of your portfolio. And it might change your portfolio’s risk profile. Because of this uncertainty, it’s easy to get stuck on a financial decision.

There’s a solution, though. In my view, there are three priorities to weigh in making financial decisions. They are, in order: managing risk, pursuing portfolio growth and, where possible, managing taxes. Evaluating decisions through this lens can be useful because it helps to answer the question, “How urgent is the proposed change?”

If you’re changing your asset allocation to reduce risk in your portfolio, you might decide that’s the most important thing—more important than whether it affects the future growth of your investments or if it results in a tax bill. On the other hand, if the reasons behind the proposed change are lower down on the priority list, then you might proceed more deliberately, spending more time thinking about the potential for unintended consequences. I’ve discussed, for example, the “magazine cover indicator.” In short, financial headlines have been found to be contrary indicators and shouldn’t be relied upon to drive financial decisions. With news headlines, in other words, the risk of unintended consequences is high.

Today, in fact, marks the 25th anniversary of one of the more famously incorrect predictions: The cover of Barron’s magazine on May 31, 1999 declared that Amazon was a “silly” idea and dismissed Jeff Bezos as “just another middleman.” To be sure, Amazon’s stock could have gone either way, but this is an example of where Chesterton’s fence could have been helpful.

2. Importance. Another reality of financial decision-making is that some decisions are simply more important than others. A change to your asset allocation—moving dollars from stocks to bonds, for example—might have a very significant impact. It would thus be worth careful consideration. But with other decisions, the impact might be more limited.

Author Karsten Jeske, who runs the Early Retirement Now blog, is highly analytical, often carrying calculations out to three decimal places. But for some decisions, his recommendation is—unexpectedly—to “just wing it.” If we can’t be sure how a decision will turn out, but it wouldn’t make a big difference either way, then we shouldn’t get too hung up on it. In those situations, in Chesterton’s terms, we don’t have to worry as much about upsetting the status quo.

3. Probability. In his 2023 book Decisions about Decisions, Harvard Law School professor Cass Sunstein offers a recommendation: Don’t focus on the likelihood of being right or wrong with any given decision. In many cases, that’s simply too difficult to know because we can’t predict the future. For that reason, Sunstein suggests not trying to forecast the likelihood of an event. Instead, where possible, he suggests weighing the cost of being wrong against the benefit of being right, both of which are easier to estimate without having to forecast the future.
4. Tax impact. Another key challenge in investing is that it often involves weighing multiple unknowns against each other. Suppose, for example, you have an investment you’d like to sell but aren’t sure if it’s worth the tax impact. You can’t know the answer to this question because you don’t know how each investment will perform in the future. If you’d sold Amazon 25 years ago, for example, you would have been very unhappy. If you’d sold Enron, on the other hand, you might have paid a bundle in taxes but would have sidestepped its subsequent bankruptcy.

What’s the solution? No amount of research can help investors predict which way a stock will go. But if you own a mutual fund and are considering selling it, the task might be easier. According to the data, high-cost funds, on average, underperform low-cost funds. So if you own a high-cost fund, you could weigh its annual expenses against the tax cost of selling it.

Suppose you have a $10,000 investment in a mutual fund that charges a 1% expense ratio. That would be $100 per year. If you switched out of that fund into an index fund charging, say, 0.03%, you’d save nearly $100 each year going forward. Now let’s consider the tax side of the equation. If you have a $1,000 gain on the fund you own and pay 20% in taxes on that gain, then the tax cost would be $200. Result: After two years, you’d come out ahead on this decision. In that case, you might decide to proceed.

5. Alternatives. In the tax example above, you’ll notice I left something out: I assumed that the only difference between the two funds was in their expense ratios. But that’s an oversimplification. In reality, any two funds will likely perform differently going forward, and that difference could easily change the result. In other words, very few financial questions can be evaluated with simple calculations. That’s why, especially where there’s less urgency and more uncertainty, I recommend viewing decisions in less binary terms. Instead, look for ways to split the difference, to remain in the center lane.