Aim For Simple Plans

The ideal financial plan is robust. It withstands and possibly benefits from future events that did not form part of its initial design. If we could follow Nassim Nicholas Taleb’s idea of anti-fragile we will be better, but not all parts of a financial plan can follow that path.

So for some investment parts of the plan we look for anti-fragile while for other parts like personal mortality and health we may settle for robust. How can we tell when robust is there?

There is no good way to be sure everything has been taken into account and dealt with because the future will certainly hold surprises. We can deal with other parts though and we should.

  1. Insure risks because that is the cheapest way to deal with them. Uninsured income is not robust, nor is it anti-fragile. We can estimate that the future will be at least a little like the past where health and premature death will be an issue. The extent may change but the subject will be real.
  2. Save and invest. Some day you will stop working and will need money to live. Assess the amount you will need factoring in taxes, inflation, and life style changes.  Create an investment plan with a reasonable yield., Calculate the savings need this month to achieve it. Then save the money every month. 
  3. Minimize exposure to debt. Debt is unpredictable in terms of interest cost and tight budgets don’t have much room for quantum leaps in this cost.
  4. Simplify. Complexity is your enemy. Complexity is fragile. Neither robust nor anti-fragile. Simple plans have enough ability to go off the rails. Complexity adds derailing options, some of which are invisible in the beginning.
  5. Simple plans are easy to communicate.  That might not matter now, but what if you aren’t around. Could spouse manage the complexity? Could anyone? Then what?
  6. Know about and beware of situations that have potential built in for adverse consequences. Decades ago, before capital gains were taxable here, we acquired a client who had made and kept about a million dollars by buying and selling farms. About $10 million today. All treated as capital gains even though trading gains might have been more reasonable. We asked our tax unit to suggest some estate planning options. Their pithy reply, “If the tax department discovers how he made his money, there won’t be an estate to plan.” Could be a blemish in an otherwise reasonable plan.

We are not smart enough to handle complexity in situations where the outcome matters. Understand what you are doing and why you chose the method you did. Avoid advisors who rely on complexity to add to their own allure and to lead you where you need not be. Make them explain until you understand.

Simple and Robust should be your base position.

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.  866-285-7772

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