It is a mistake to be linear in a non-linear world. The mistake shows itself most readily when we try to assign a single cause to a particular outcome. All linear thinking requires one cause per outcome. This is a massive mistake and it is very easy to make. Your plan will not cause a prosperous retirement. Except in the simplest cases, “cause and effect” almost does not exist, and life is far from simple.
Consider the financial crisis in 2008. What caused it?
- Sub-prime mortgages that lead to a housing boom. The banks caused it because they created packages of mortgages that allowed them to finance far more than they might have been able to do otherwise.
- The government caused it with their Affordable Housing Initiative, begun at least as early as 1992 and probably even in the late 70s. That required Fannie Mae and Freddie Mac to accept mortgages that were substandard. 30% early on and 55% by 2000.
- People were greedy and saw that with low financing standards, there was an opportunity to make a quick buck. Low standards means more potential buyers.
- With no risk to themselves, and handsome commissions, mortgage brokers sold people on the idea of refinancing or buying housing.
- The real estate market is cyclical and it was just a normal adjustment.
- The demographics. More young people buying first homes.
- Greedy home builders.
- Misunderstanding of the difference between sub-prime and prime. Sub-prime borrowers tend to make some of their payments with new debt, usually credit cards, while prime tend to pay from income.
People who deeply understand the real estate, mortgage lending and government relations aspect could no doubt enhance this list. The point is the end came as the result of all of these and more. There is no single cause. It would be hard to weigh the many components in wider analysis of cause. Most of the weighting would end being a priori.
On a personal finance level, successful retirement is not the result of any single action or activity. The list of things done, not done, experienced, learned and accidentally discovered is vast. No one is successful because of one action or one personality trait.
Why then do people want to create plans that solve retirement? By themselves, they cannot and mostly do not. The process of planning tends towards success as opposed to no planning, but it includes no guarantee. The process of planning, acting, recording, revising and acting again tends to work.
It is like working your way through a maze. Not every turn leads you towards where you expect to be in the end. The key to success is to recognize dead ends more quickly and revise your path.
There is no magic potion nor is there a silver bullet. To expect one leads to failure. For most people, an advisor can help them through the maze because they can at least recognize the dead ends that others have tried in the past. There will always be new ones and prompt adaptation wins.
To assume a specific cause will result in a desired effect is failure prone.
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. firstname.lastname@example.org 866-285-7772