Conventional Wisdom Versus Strategic Wisdom

One of the things you learn early as a math student is you cannot memorize every possible solution type. Instead, you learn to understand how the system works and if a new problem type arises, you can apply the general approach and work out the solution. You must know how it works instead of making it fit into some pre-learned but not fully understood solution type. As an aside, you don’t remember the answer types forever, just how the system works.

Seth Godin makes the same point with a different field of study

Two kinds of good cooks

“One is very skilled at following the recipe. Quality control, consistency and diligence.

The other understands how the recipe works, sees patterns and opportunities and changes the recipe to fit the problem to be solved. It’s about metaphor in addition to process.

Both are useful.

If you think this is a post about cooking, you might be the first kind of cook.”

The difference and how it applies to financial things

The first type of good cook applies to financial planning, budgeting and investments. It is about finding a way to do it and then repeating it forever. Maybe you have a book on the subject and just fill in the blanks and thus have a plan. Or you let a planner plug you into a program. You should expect to get an average answer.

This way is tactical. It assumes an overarching vision and study of the strategic questions and assets that will allow it to work out. If you want to explore better, you will need to think strategically.

The problem, of course, is that in financial life, things change. Tactical managers tend to have trouble adjusting to that problem. A new release of their book-based method may possibly deal with inflation higher than 3%, tax changes, or having another child.

Tactical recipes are tools amended over time to be best given what people can do up to that point. The second cook is strategic. They understand what they have to work with and how it can be adjusted to meet different circumstances. They can infer other ingredients and methods. Something similar to the tactical recipe is where they will end up most of the time.

The strategic chef can see past normal to a new ecipe that advances the outcome. Sometimes the improvement is spectacular.

Some variations

The conventional wisdom is conventional. They don’t suit everybody, but you should treat them as reasonable until you can understand why your particular situation varies from what is assumed in the specific conventional wisdom. When you think strategically, you will often find a better way to accomplish your goals.

The stewardship option.

When designing a portfolio, conventional wisdom says your equity component should be “100 – your age” percent. That idea relates to volatility and how it affects aged people more than younger people. If 30% of the value of your equity investments disappears, you don’t have any chance to get it back. That relates to risk and the amount available for use later. The strategic approach relates to more variables. What if you have no reason to use the money in your lifetime? Thus no particular concern about volatility. Then what is the proper share of equity in your portfolio?

We know the long-term average of the S&P 500 Total Return Index is several percentage points higher than bond yields. The difference is quite variable on a year-to-year basis, but it can be 4% different over more extended periods. Let’s suppose someone is 70 and, if in good health, has a reasonable life expectancy of 20 years. Further, assume they have a portfolio of $500,000. At 30% equity earning 10% and 70% bonds earning 6%, in 20 years, you will have $2,131,000 for your estate.

If you have no possible use for the money and don’t want to pass it to the children yet, should you invest based on the conventional profile? To follow conventional wisdom is costly. Investing at 70-30 yields $704,000 more. If the children are willing to live with more variability, 90-10 would add $1,056,000.

Understanding your particular situation adds value.

These numbers assume no costs to invest, taxes, or adjustment to the equity percentage as you grow older. While these matter, they don’t change the shape of the outcome. 33% to 50% more.

Knowing how your estate and your assets while living connect is a crucial bit of information.

The same sort of analysis works for the right debt or income level in retirement percentage compared to current income.

The bit to take away

Never make a decision based on conventional wisdom without assessing your particular situation. Only then decide if the conventional wisdom applies to you. It probably won’t exactly apply.


I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, 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. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.

 

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