We Should Be Asking Better Questions

Should my brother travel by train?

That is a very simple question, but you can’t answer it. Not in any meaningful way. It’s a yes/no question, so you could just guess, but even if you’re right we’d all know it was just a guess. If you wanted to answer that question credibly, reasonably, or authoritatively, you’d need more information.

One thing you’d need to know is where my brother is.

That’s why I used my brother instead of myself in my question, by the way. I had an ulterior motive. It was to deprive you of as much information as possible. You can look at my profile and see I live in Virginia Beach. That could be useful information about whether I should travel by train. Of course, I might not be in Virginia Beach as I type this, but you would probably assume I am. Assuming my location would help your brain create a narrative in order to answer the question. My brother – you don’t know where he is. Sure, he might be in Virginia Beach, too, but that’s a much bigger assumption than where I am.

My brother lives in Boulder, Colorado.

So, should he travel by train?

You still can’t answer the question, because you don’t know where he is going. You actually don’t know for sure where he is, either. I told you he lives in Boulder. He might currently be in Zurich, which would be critical to know when answering the question. You would probably assume that because he lives in Boulder he would also be traveling from Boulder, even though I never actually said that. Again, your brain will take shortcuts to be able to get to an answer.

So… can you answer the question? Should my brother travel by train?

OK, enough with the trains. I’ll get to my point…

I see a similar question asked and answered on the Bigger Pockets forums regularly. That question goes like this:

Should I contribute to my 401K?

That is a very simple question, but you can’t answer it. Not in any meaningful way. It’s a yes/no question, so you could just guess, but even if you’re right we’d all know it was just a guess. If you wanted to answer that question credibly, reasonably, or authoritatively, you’d need more information.

Like a train, a 401K is a vehicle designed to take you from one place to another. Instead of asking the person posting the question where they are currently located (financially) and where they are going, many well-meaning people just answer the question. “Yes, of course!” or “No, invest everything in real estate!”

Our brains are marvelous things. They convince us we know things we don’t really know. We take small pieces of information and piece them together with things in our personal experience to make a narrative we think is reality. It isn’t always accurate, and its influence on our decisions can be profound. Dr. Richard Thaler recently won the Nobel Prize in Economics for exploring the consequences of limited rationality, social preferences, and lack of self-control on markets.

We see a post on the BP forums – a forum for real estate investors – and we make assumptions about the poster’s financial circumstances and/or preferences based on our own experiences. The assumptions of any individual respondent might be accurate, resulting in good advice. The assumptions of others may not be accurate, resulting in bad advice. It’s a craps shoot. I think we can do better than a craps shoot.

People have a great ability to believe specifics that apply to themselves apply generally to everyone else. If someone is making 20%+ through real estate investing, they will have a tendency to believe everyone could (and should) be doing the same thing. In their experience an employer-sponsored 401K makes no sense. They extrapolate that experience to the poster asking the question.

People also have a great ability to perceive the general should apply specifically to everyone (except themselves, but that is another story.) Statistically, most people will receive a significant benefit by participating in their employer-sponsored retirement plan and taking the matching money. Recommending this to everyone who asks seems full of wisdom and good sense, but this response does not work for everyone in every situation. Would you tell someone she should put money into the 401K at her new job if the 401K plan had a 3-year cliff vesting schedule and her life plan was to quit working in 2 years to start a family? That matching money isn’t very valuable to someone in that situation.

The silver lining is that by the time there are several dozen responses to the original question, the original poster has been exposed to most of the pertinent issues involved in making a well-informed decision. I just hope they are sticking around long enough to read the entire thread as it twists and winds along it path.

As a financial planner I am frequently asked some form of the same question. It usually comes very early in my relationship with a client (before we have established their goals). “Where should I invest this inheritance?” “Should I use my 401K or an IRA?” “Stocks or real estate?” “Where can I get a better return than CDs?” “Is the Virginia 529 good?”

People want short and easy answers. Unfortunately, investing doesn’t work that way. Not well-informed investing. Certainly not investment planning. Investment planning, if done properly, is much more arduous and messy than most of us want or expect. (Somewhat like childbirth, it’s beautiful but you might need a bucket and a mop before it’s over.) Asking easy questions and giving easy answers isn’t a reasonable substitute for making a real plan.

In my experience real estate investors understand their investments more than securities investors understand their investments. One of the things many real estate investors seem to prefer is their ability to understand the investments they are making. It shouldn’t be too great a leap for them to fully understand someone’s financial situation and goals before recommending whether the other person should be using a specific investment vehicle.

In other words, there’s no reason the engaged investors on the BP forums should be giving the same random advice I see on other investing forums. It takes a little more work, but I encourage you to roll up your sleeves and ask the poster some real questions before firing off some generic and potentially random advice.

Investments are a vehicle to get you from one place to another. That’s it. No one can pick the right investment vehicle for you unless they know where you are starting and where you are going.

After all, you still don’t know if my brother should take the train or not.

Best of Luck on Your Journey.