The term “known unknowns” and “unknown unknowns” are often used in strategic planning. Given that our job is to strategically plan the financial lives of our clients, a thorough understanding of both unknowns is extremely valuable.
What are “known Unknowns” and “unknown unknowns”?
The concept was first introduced by former US Secretary of Defense Donald Rumsfeld. According to Rumsfeld, “There are known knowns; the things we know we know. And there are known unknowns; the things we know that we do not know. But there are also unknown unknowns–the ones we don’t know we don’t know.” The entire idea is based on awareness. If you foresee a certain risk, then you will likely factor it into your planning. If you don’t foresee the risk, it can be harder to plan for. Our belief is that when it comes to investing, you must construct your portfolio proactively factoring in both knowns and unknown risks. This element of financial planning is called contingency planning.
Elements of Contingency Planning
Always remember that investing doesn’t happen in a straight line. There will be bumps along the way, you may see some risky events coming at you straight on, like the 2020 presidential election. Other risky events you might not see until it’s too late, like the Covid-19 pandemic. The key is to plan for both types of events proactively. Some important elements of contingency planning may include: Insurance, hedging and asset diversification. One of the easiest ways to plan for unknown risks it to implement the three-bucket asset allocation strategy. We use this strategy extensively with our clients and have highlighted how the strategy works in the video below:
Financial Advice is Crucial
Time generally heals all wounds if you stick with your long-term plan. If you or someone you know are in need of financial advice, we are always happy to chat. We don’t charge for the first consultation, and there is no obligation to sign-up. Contact us to book a free financial consultation with one of our licensed financial advisors.
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