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Margin for Error

The other day, I took my kids to an unnamed parking lot in the area (plausible deniability, you know) to work on their driving skills. Ok, that’s a generous description of our goals. We were working on differentiating the brake pedal from the other pedal next to it. And in their defense, this is more theoretical for the younger two, as they are not quite tall enough to reach said pedals.

But Marcus really began to get the hang of driving and was soon making turns and ending up mostly in the correct lane. The key, I told him, was to keep a safe distance between his vehicle and the curb, his vehicle and the center line, his vehicle, and any surrounding objects. As I thought about it, that seemed to be a decent description of safe driving: keep a safe distance, travel at a safe speed, make smooth and predictable movements across the road to avoid collisions with other drivers, and keep a sharp eye out for the crazies.


Investing really isn’t much different. A lot of disciplined investing comes down to keeping a margin for error between what you estimate will happen and what you absolutely need to have happen for you to succeed. Here’s what I mean:


Let’s say your financial plan has you successfully funding your retirement and even your dream home renovation, as long as you earn (X)% annually on your investments. But if you earn (X-Y)%, the same financial plan shows you plummeting into despair. You have two options:


  1. Stress and wring your hands on bad days in the market, or

  2. Build up more savings.


Here’s another example of margin for error, and it’s not even your error: Let’s say you are expecting 100% of Social Security to pay out as planned. But that nagging suspicion in your mind becomes reality when, as they are currently claiming, the Social Security Administration runs out of funds in 2034 and begins paying approximately 20% less than you were planning to receive. First, if that were going to happen, you’d like the bad news now, rather than later when you cannot do as much to shore up the deficiencies. Second, wouldn’t it be nice for that to only be an annoyance at a broken political promise, and not also a financial catastrophe?


So, what are the ways that investors create margin for error? The first strategy that many people think of is having sufficient assets in cash or cash equivalents, something that can be accessed quickly, and not create a massive loss or tax hit if withdrawn. And but for the historically high inflation levels we’re seeing (and will likely continue to see for a while), we might have agreed. But now this idea often needs to be combined with treasuries or money market instruments to soften the deteriorating impact of inflation on your purchasing power.


Another way our clients create margin for error is by controlling spending when they don’t need to spend, and then investing or saving what they did not spend. The second half of that equation is what differentiates them from the folks who saw savings go down just as fast after COVID as they saw them rise during the pandemic. If you don’t tell your dollars where to go, they will tell themselves.


For several clients, properly structured life insurance policies have served as their own “bank account” of sorts, providing upside growth potential, but limiting the downside, and creating a place for tax-free growth and distribution. (As always, confirm with your tax advisor on anything tax-related to make sure you’re doing it correctly). This strategy deserves its own post, or even series, and we’ll work on that in future publications.


A final key we must underline is that wise investors do not take investment risks that they cannot emotionally tolerate. One of our main “gut-check” questions in our planning process comes after we look at how your hypothetical portfolio might have fared if the same bear market that hit in 2008 were to revisit us today. Seeing an actual dollar amount loss (though hypothetical) is one of the closest things we can do to helping clients experience what their investment risk might “feel like” if the market took a dive. And even if they could mathematically afford it, the emotional toll is sometimes too much. Better to know that now, and not risk what we have and need for gaudy returns that we don’t have and don’t need.


So, whether you’re trying to stabilize your finances, or optimize your cash and maximize your opportunities, you are wise to keep a respectable margin for error, and not to rest your entire future on things falling exactly right, when you know they likely will not.



Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice.


The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected including diversification and asset allocation.

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