The Reserve Clause

Dec 19, 2022

When I first started working in the financial services industry, I had it ALL WRONG. 

I thought that in order to become a good financial advisor I needed to know how to analyze investments...all the technical shit. 

Like how to REALLY analyze investments. I'm talking about digging into company financials and reading their quarterly reports kind of stuff. 

I naively thought there was a science to this type of work and that it was necessary for me to learn...ha! 

I thought I could use a formula like the discounted cash flow method to learn if a stock is priced correctly or if it would make a worthy investment. 

But what I found is that most of these formulas rely on guesswork.  

You have to guess what you think the growth rate would be, how the dividend may change, etc. 

If I'm losing you with this talk about dividends and growth rates and formulas...stay with me...I'm setting the stage before getting into the interesting stuff. 

I want to talk about predictions and outcomes and behaviors. 

Humans are unique animals. We try to use our history to predict our future. And then stress about what we predict may happen. 

Why do we try to predict EVERYTHING? 

I'd guess we make predictions because we find comfort in the idea that we might know what will happen. We don't like uncertainty.  

This is especially true when it comes to money. 

People often come to a financial advisor/financial planner because they're nervous about their future. Many people believe an advisor knows more about the investments and even has an idea of what will happen going forward. 

I'm here to tell you that isn't the case.  

There's a lot of predictions, aka guess work, that takes place in the financial advice space. 

Always has been. Probably always will be. 

We don't have any idea what the stock market will do, what inflation will be, what the tax rates will be, what will happen in the housing market, what will happen in other countries, how social security will be funded, and so on.  

A lot of what we do is predicated on what's happened in the past. 

While also providing disclaimers that what's happened in the past isn't any indicator of what will happen in the future and therefore it shouldn't be used to predict what will happen in the future....huh?! 

Most of our traditional tools for creating a financial plan rely heavily on these predictions. 

We input client incomes, expenses, account values, investments allocations, estimated savings, etc. Then use that data with the built in assumptions in the software for inflation, investment returns, taxes, etc. to predict where a client might end up in the next 20 to 30 years.  

We even use this information to run a "Monte-Carlo" - a simulation of usually 1,000 different what-ifs. This simulation then spits out a probability of success - yay your plan succeeded 84% of the time!  

Don't get me wrong - there can be benefits to using these predictions. 


But I want to introduce something else...a different way of thinking that will hopefully help reduce the stress around the what-if-ism. 

Let me introduce the Reserve Clause. 

It's an idea mentioned throughout Stoic texts. Marcus Aurelius learned it from Epictetus's Discourses. 

So what is it? Operating with a reserve clause means that when you undertake an action, like saving for your future, you accept that the outcome isn't entirely in your control.  

We are going to take this action while excluding assumptions about the eventual outcome. We're not expecting success nor failure. We're simply taking action on the things that we can control right now. 

We reserve our expectations of those things that are out of our control....hence the name reserve clause. 

There's a great example of the reserve clause used by Cato of Utica. (Cicero writes about Cato in his dialogue, De Finibus) 

In order to explain the concept of the reserve clause, Cato uses an example of an archer.  

He says the archer's goal is to fire his bow as skillfully as he can. He has to do what's within his sphere of control while remaining detached from the outcome. 

Any number of events could result in his arrow not hitting it's target. There could be a strong gust of wind that throws the arrow off course or the deer he's hunting could move.  

The only thing the archer can control is his actions, his aim. 

When thinking about your financial journey, remember the archer. 

Nothing is under your control except your own actions - how much you save or spend, how much debt you take on, the risks you take and the protections you put in place. 


Focus on your aim, not your arrow. 

And operate with a reserve clause. 

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