Sometimes people attribute power to things that cannot deliver.
“As far as the laws of mathematics refer to reality, they are not certain and as far as they are certain, they do not refer to reality.”
Try that sentence again and replace “the laws of mathematics” with “our ideas about the future.” Certainly true.
Try that sentence once again and replace “the laws of mathematics” with “our financial plans.”
Still true. Financial plans are not reality and failing to notice that imperils their outcome. Financial plans adapt to reality, they do not establish it. People who think they have completed a financial plan are wrong. No financial plan is finished until a year or two after the planner’s demise.
Financial plans are less like Euclidian geometry and more like quantum mechanics. Geometry is determinative while quantum mechanics is predictive. Financial plans can work successfully without knowing all the details so long as they reflect the tendencies imposed by the rest of the world. Just like you do not need to know where every photon is to create a laser. Sufficiently strong probabilities create operationally feasible plans.
So what are some of the tendencies that we can employ?
- The long run in finance is more predictable than the short run.
- Everyone has a long run. From now until just beyond the end of life. For a couple, the second life. If you are a couple and 45, at least another 40 years. Probably more as science lengthens life span.
- Average life span only applies to the entire population. Any individual could pass away in the next 15 minutes or live 60 years. If that ambiguity matters to you financially, you can shift the risk to an insurer.
- Equity markets reflect the ability of businesses to organize resources, to innovate and to create customers. Combining creates wealth.
- Cash is a poor store of value. Holding cash in the mattress loses because generally money depreciates. Just like the rest of us, cash must work to build value or even hold its own.
- Governments will use money for things you might not choose to do, but that’s the way it is. Learn to manage taxes. Even a little helps.
- You cannot have investments until you divert capital from spending. Start soon.
- Compounding growth is a powerful force, but it is not linear. Some people become inpatient even though things are working exactly as they should. Know the law of 72.
- Debt can harm you.
- Risk harms you when it is driven by fear. Temporary fluctuation in the price of a security is not harmful. Remember, the stock market says nothing about fundamental value. It is a pricing mechanism and as such is emotional.
In summary. It works if you have clear and reasonable goals, save some, invest and stay invested, manage your lifestyle, manage risk, remain disciplined, learn about the real world, have an advisor as a conscience and guide, focus on the the rest of your life plan and treat money as a tool not a goal.
How easy is that?
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.