Planning is multiphasic and an important part is review and revise. This is the part where you learn about things as they have happened. Things you could not have foreseen or have missed in your planning. Not a problem. Everyone misses things and to top that the world changes, often materially.
The review part is often handled poorly. The horror occurs when revision occurs because of a mistake in the review part.
The most common mistake is to measure the wrong thing or to use the wrong indicator as the proxy for achievement.
In financial planning there are several possible measurements and people often look at just one. Rate of return.
Like all numbers, rate of return is only a useful measure in context. Is 7% good? Maybe. Not so good if with the same risk and effort you could have had 10%. Not so good if you need 9% to make your plan work. What if you needed 9% and made 7% while everyone else lost 2%. Now is it good?
Rate of return is useful but not important enough to make it the only measure. The reason is that rate of return is not money. You cannot spend percents. Most financial plans are interested primarily in money. For spending or for security or for flexibility and emergencies.
If you measure the wrong thing you will get weak answers. If you attribute value to a number and that value exceeds it ability to deliver meaning, you will get weak answers.
Numbers are proxies for meaning and should be treated that way. Meaning is more difficult but more necessary.
Meaning is qualitative instead of quantitative. It is about what your finances are for, rather than how much.
$100,000 is not much if you spend $10,000 a month. It is quite a lot if you need $500 per month to supplement your pensions and government benefits.
Yield is not important until you assess inflation. Earning 10% before taxes when inflation is 8% is not the same as earning 4% when inflation is 2%.
Time matters. 8% for 36 years is about twice as good as 8% for 27 years. A little more time matters so start just a little sooner.
The quality of your net worth statement matters. A highly leveraged net worth may not be quite as good as a smaller net worth with much less debt.
A high rate of return may not mean anything if the currency or the risk of non-payment is high. Greek bonds are pretty lucrative on the yield side, (16% or so) but risk is a serious consideration.
The trick is to use quantitative results like capital saved or rate of return as a pointer to establish qualitative success. Without qualitative emphasis, it is very easy to fool yourself into believing that you are on the right path.
Find a way to measure the meaning of your results.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.