Help! This Is a Super BFD!

Could the world feel less certain? It’s hard to imagine how. No one knows if they’re going to have a job in six months. The stock market makes no sense, even to people who believe the market normally makes sense. And Google just told its employees to stay home for another year.

Even if your knowledge of the financial world comes from listening to the radio during those magic moments between ordering a Pink Drink at a Starbucks drive-through and picking it up at the window, you’ve probably heard the expression “the market hates uncertainty.” And this isn’t just uncertainty. It’s uncertainty with a side of uncertainty about the duration of the uncertainty. The world could feel “normal” again in six months. Or it might feel exactly like this in 2022. Who knows? Not us. And not you.

And yet decisions must be made, sometimes big ones. Let’s call them BFDs — big financial decisions. But how do you know if you should go ahead with a BFD right now? Should you start a business? Make a big investment? Buy the house you were thinking about before all this started? Or decide not to do anything — remember, choosing not to do something is just as consequential a decision as choosing to do something.

To figure out how to think about BFDs at this WTF moment, we spoke to two of the calmest, most reassuring people we know: Zoe Wolpert, Wealthsimple Senior Investment and Retirement Specialist; and Ben Reeves, Chief Investment Officer. They broke the process down into a series of questions you should ask yourself — which happen to be some of the same questions Reeves asks himself when he’s deciding whether to make or change investments in Wealthsimple’s portfolios.

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Why am I making this decision now?

In a lot of ways, making a BFD now should be no different than making a BFD in 2019 or 2011 or 1972. Because most BFDs are not about gauging market conditions or knowing the future.“No one should decide what to do by trying to guess what’s going to happen tomorrow — financial decisions should be made with the long term in mind,” says Wolpert. “If you’re doing that, then now may be as good a time as any to make a big decision.”

If you’re making a BFD because you’ve lost your job or have endured a financial calamity — that’s not about guessing the future either. It’s about using the resources you have, if you’re lucky enough to have them, to survive the moment.

What is my goal?

The next step is to tune out the noise of the moment and ask yourself: what am I trying to accomplish? Are you trying to build wealth? Are you trying to change your lifestyle? Are you trying to address the fact that you’ve always wanted to own your own home or start your own business? Are you trying to put yourself on the right financial track? Whatever it is, write it down.

And maybe more important is to ask yourself if there’s a goal behind that goal. If, say, your goal is to increase your income, is that because of emotional reasons, because you feel stretched, because you are behind on your retirement savings and watch to catch up? The answer is important. It informs the next question: is this decision the best way to reach that goal?

Take buying a house — the biggest one-time BFD many people make in their lives. “Ask yourself, are you buying a home because you value having a place to call your own, with no risk of your landlord kicking you out?” Wolpert says. “Or are you buying it because you want to flip it in three years? Those are very different decisions. One is a decision that you’re making for the long term based on lifestyle. The other is a bet that you are making based on the assumption that it will be worth more in a short amount of time.”

If your goal is the latter, you have to ask yourself if buying a house is best way to accomplish that. “People often overestimate how wise an investment a house is,” Wolpert says. “If you look at the stock market versus the Canadian real-estate market overall, the stock market has done much better over time.” And it’s also never a good idea to lock up too much of your wealth in any single type of asset — it’s best to diversify. All that’s to say, there may be less risky ways to build wealth than buying a house. We’re not saying you can’t buy a house to flip it, of course, you just have to know, and be ready for whatever might happen to that investment. Which brings us to…

What’s the range of possible outcomes?

Reeves points out a common mistake in logic folks often fall prey to: spending too much time imagining the best possible outcome. That isn’t the smartest way to do it.

Instead, figure out what all future scenarios might be. What does it look like if it all works out? And what does it look like if it doesn’t work out? And what does it look like in the most likely scenario: somewhere in between?

Let’s take the house example again. Say you leverage yourself completely, picturing how much your house is going to be worth in five years. “But if you’re stretching yourself to pay a mortgage, and the value goes down, and you can’t make the payments, you lose everything you’ve put into the house,” Reeves says, because he’s always so optimistic (;-)). “Meanwhile, you may have undersaved for things like retirement and your kids education, so you could end up with little savings.“ Can you handle that?

“It’s good to set parameters for yourself,” Reeves says. “When would I need get out an investment, and why? Am I going to be forced to sell? Do I need the money for something else, or can I hold on and wait until the housing market improves?"

And then there are the non-financial range of outcomes of a BFD. Like: what if it turns out I don’t like my new business, or living in a new neighborhood? One way to mitigate this, Reeves advises, is: “de-risk it by trying it out first. If you’re thinking about moving to Florida, go live in Florida for a month. Am I retiring and going to play golf? Do you actually want to go play golf? What’s it like to live in the neighbourhood where I’m thinking of buying a place?”

How comfortable are you with the risk?

How much risk do you want to take on? And how much stress would that risk cause you?

Part of the answer to that is your situation. Take the house buying example. If you’re taking on debt, you should ask yourself how stable your income is. “Are you a tenured professor at a stable institution?” Reeves asks. “Then you kind of know what’s going to happen, right? You can depend on that stream of income. If you’re a nightlife impresario, I’m a little more worried. My friend tried to open a restaurant. That’s really hard. If you’re doing that, maybe don’t buy a house at the same time.”

And part of the answer depends on your personality (and psychology). Some people are comfortable with a 25% chance of an unfavorable outcome, as long as the potential upside feels worth the risk. Other people would have a permanent case of insomnia with anything even close to those odds. Where do you fall on yourself where you fall on this spectrum? If you are emotionally uncomfortable with risk, it may simply not be worth it.

Now make your decision and keep your eye on your goal.

Once you’ve made the call, don’t get distracted with what happens in the meantime. In the house example, if your time horizon is long enough, you don’t need to worry about what happens with the housing market in the meantime. As long as you’ve provided yourself some cushion for things to go a little nuts in the short term (which is always possible, pandemic or not), you can do what we always advise: keep calm, and carry on.

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