You can plan a picnic but you cannot keep it from raining.
Financial planning is like that too. There are always external circumstances that you cannot control. The best you can hope to do is know about them and understand the possibilities and your options should something adverse occur.
Long Term Capital Management was a hedge fund that planned the picnic but did not prepare for the rain. The 1997 Asian crisis and the 1998 Russian sovereign debt market collapse led to their ruin in 1998.
LTCM had some of the brightest people in finance, two had Nobel prizes, so intellect is not the problem with preparing for rain. One of the rules of life seems to be that the brightest people make the biggest and most costly mistakes. They do that because they think they can adapt to situations as they arise. Only a few anticipate a worst case scenario.
Personal financial plans are a little different. Nothing so grand as a sovereign debt market collapse. There are human possibilities though and they can be just as devastating.
- The principle income earner(s) may die or become unable to work.
- A spouse may die or become disabled.
- Parents may need assistance
- A child may need assistance or help with an opportunity
- An estate plan may assume that all the heirs are competent.
- A succession plan may fail if the successor dies before the parent
- Investments may under-perform or even crash
- A corporate pension plan may fail before you retire
- The government may change the rules on income tax or estate taxes
- Inflation may be rampant
- And dozens more.
Plans need not focus on crisis and chaos but they may not exclude the possibility. Plan B matters and should be present.
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.