I have been trying to understand the point of a financial plan for the last month or so. I have come to the conclusion that only a few people know and I am not certain that I am among them.
I have talked to a number of people who prepare financial plans. Adjusted for clarity I have these general answers to the question above:
To come to grips with preparing good financial plans, we need to know more.
First of all recognize that no plan works. If the plan is not going to work, then accuracy is not a value. Internally consistent might be good but accuracy or precision or elegant mathematics will likely just hide things.
Most of the original thought on planning comes from the military. Military planning predated personal financial planning by centuries and is well known. One of the great military philosophers was Field Marshall Helmuth von Moltke the Elder. He was Chief of Staff of the Prussian General Staff from 1857 to 1871. One of his maxims is “No plan of operations extends, with any certainty, beyond the first contact with the main body of the hostile force.”
Why? Because the outcome of the first battle is unknown. The remaining resources are unknown as are those of the opponent. You cannot know what to do unless you know what you have to do it with.
Reworded, “No financial plan survives first contact with unforeseen reality.” You need to be able to adapt and the plan needs to allow that.
Second observation is that all plans reflect more of the planners biases than they reflect the real world. The planner cannot know everything so unless there is a clear outline of assumptions and the meaning of the assumptions, the plan will be purpose driven. You should aim for a range of assumed values within which the plan will work but you need to also communicate that that range of values may represent only a small share of the possibilities.
So, where to go once we know the plan will be biased and soon wrong?
We should adopt the approach that planning is to help us understand our circumstances. How the pieces come together, how they might come together in future, and what are the limits to possible outcomes.
Is the plan specific to the present, like arranging insurance or financing a house, or is it longitudinal – pertaining to a long time period. Specific plans can be measured against real world conditions as they exist now. There are no others that you can relate to. As long as future flexibility is addressed you are finished.
Longitudinal plans are for other purposes.
Longitudinal plans should never be done with an emphasis on accuracy. They are for direction and to provide a reference base for future changes.
On the positive side, again from the military, “Plans are useless, planning is necessary.” Dwight D. Eisenhower
Financial planners should get past the idea of plans that only facilitate sales. Remaining in the product world means the clients will be less well served, and the profession will be demeaned.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. firstname.lastname@example.org