If you drop by almost any brokerage firm or bank these days, you can walk out 45 minutes later with a “financial plan” that viola, transforms all of the uncertainty in your life into certainty. After all, that’s what everyone wants…certainty. While we crave precision, exactness, and certainty, these are not financial planning objectives. Real financial planning, (as opposed to the quickie computer model kind of planning), is concerned largely with uncertainty.
Uncertainty is reality. The fictional narrative that we carry around with us each day in our head is our version of processing this reality. Everything is uncertain. Just putting a series of assumptions about the future on paper (or a digital screen), does nothing to eliminate uncertainty.
Take a cursory look at articles on financial planning and one can see this obsession with certainty. What if we turned all of this around? Instead of pretending that very precise inputs will produce “certain” outcomes, would we be better served to focus instead on the different levels of uncertainty? Life isn’t linear and our way of planning for the future should acknowledge this reality.
Of course, financial planning necessarily involves trying to model possible future scenarios as a way of simplifying reality. These models can help us make decisions by compressing the variables into an understandable framework. One of the reasons most successful individuals need ongoing, (non episodic), planning assistance is because actual observed outcomes will inevitably differ from the models. Mid-course corrections have to be made.
In my judgement, pretending that financial planning can create certainty sets up an unrealistic expectation on the part of planning clients. As an economics major in college, I remember the adage attributed to John Maynard Keynes “It is better to be roughly right than precisely wrong.”
This is so true. Yet, both financial advisors and clients resist this wisdom.
Many of the individuals that contact financial planners are driven by acute financial issues. They want a neatly wrapped, precise solution to their near term problems even if that solution ultimately makes their overall financial life worse in the long term. They are prone to trade their longer term financial wellbeing for the illusion of short term certainty. One example of this can be found in the flock of investors who purchased annuities in the post 2008 era. These investors wanted the uncertainty of the markets to go away and the annuity salespeople gladly obliged.
How many times do well intentioned investors show up at a financial planner office to say “I can’t risk anything; I need safety”. What this really means is they can’t process uncertainty and this creates an opportunity for the true financial planner to provide education on reality and why uncertainty can be their friend. After all, uncertainty is the primary reason above inflation investment returns persist.
Yes, uncertainty is a big part of life. The key, from a financial planning perspective is to determine how much certainty you can afford. For investors in their peak earning years, trying to maintain their lifestyles for decades, the answer is …very little. Embrace uncertainty, live with it and realize just how important a factor it is in your financial future.