Financial Planning is difficult partly because people think it is easy enough.
If I read money columnists I see they think fund management fees are a waste of money. I am not sure they believe that, but the implication is that you would have a lot more money if you did not pay them.
Index funds might be the answer now, but they won’t stay that way. Like everything else in the stock market, a tactic will work as long as not many people are using it. Index funds are not infinitely scalable.
Financial planning would be easy under three conditions:
- People know the future with certainty
- People know how their psychological profile will change as they age
- People have reasonable expectations about what is possible
Reality says we don’t and can’t know the future. Even the near future. The past and present are supposed to give us some clues, but since the information today is nearly impossible to assess for validity, that does not help much. Hype is not helpful. Advertising is not information.
Even if all the information were true, it is still not knowledge. Knowledge is about how information fits. Knowledge is connected and connectable. It is not random dots.
Even if I had it, knowledge is not wisdom. How does it connect to my world and what should I do about it?
Psychology is hard. We can only estimate the reality and the timing of changing priorities and needs. Talk to older people. Ask them what used to matter and no longer does or what matters more now. Even parents know some things.
Reasonable expectations help a lot because magic and miracles are then unnecessary. Many people believe in miracles but smart ones do not rely on them. Reasonable expectations should include an understanding of how exponential growth works. Know and use the Rule of 72. Money invested today at 7% will about double every 7.3 years. Thirty-six plus years from know you would have five doubles. 32x. Linear thinkers lose track of the obvious. After 29 years there would be half as much money as there would at 36 years. After 14.5 years there is only one eighth. People quit too soon when they don’t understand.
Ronald Reagan described the situation:
“There are simple questions that do not have easy answers.
There are no easy answers, but there are simple answers.”
In financial planning the simple answers include:
- Save some money for the future
- Pay off debt
- Protect against misfortune like death or illness.
- Understand how investments work
- Understand how to balance lifestyle across the present and the probable future.
- Have a guide/conscience/technical assistant
Be humble. Every plan you do will prove itself wrong. Probably within a few years. The key simple answer is make a plan that is the best you can do knowing what you know now. Record the results. Review the results with a view to learning more. Revise the plan to more closely match the future that has partially revealed itself to you.
Be disciplined. It will take decades to work out and it will look nothing like the plan you started with. Life does not turn out like you hope.
If you would like God to laugh, tell Him your plans
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 866-285-7772