Yes, we are going to quote the economist Herbert Stein, who said “if something cannot go forever, it will stop.” Meaning – if something doesn’t have the potential to go on endlessly, then it has to end sometime.
If you’ve ever been to the Money Over 50 office, you may have seen our little chalkboard that is in the shape of a sausage dog – and it has this exact quote on it.
We like it, because we often hear people making generic statements and extrapolating when it comes to finance. Extrapolating is when someone uses prior events and data to draw conclusions and make predictions about the future. One example is when the share-market has a downturn, and prices of companies are dropping – people insinuate that it will continue on its downward trend until it reaches zero.
Of course, we know that historically that has never been the case.
Another example is when someone sees their super drop from $500,000 to $350,000 in a month. They conclude that the following month it will drop by the same amount again. But this is usually not the case. And it will never drop to zero!
How often have you heard the media talking about our national debt since the start of the pandemic? They say things like “our national debt is so bad that if we continue going as we are, by 2040 we will be broke!”
This is such a huge exaggeration, though. There are forces at play that will prevent this from happening. People talk about these trends as though they are forever – but they are not.
In fact, the human brain is wired to make and look for patterns. If the market drops by 30%, we think it'll be the same next month – but it is not correlated. And people looking to buy property often extrapolate as well. They think that if prices are up by 10% this month, they will be up by 20% next month, too. If that were true, and the 10% trend continued, property would become unaffordable very quickly. And again, there are forces at play to stop that from happening, because property would become so expensive that nobody would buy anything. And without buyers, prices can not be pushed up any higher.
So – the things that can’t go on forever (like the rising costs of property) have to eventually stop!
