Uncertainty is the only certainty for investors. Probabilities are the best we can hope for regarding long-term projections.
How about the short term? Don’t waste your time.
An example of factual overload combined with overconfidence is found in Thursday’s upcoming NFL draft. Despite an infopocolypse of data, the results are far from certain.
The number two pick in the draft (possessed by N.Y. Giants due to their putrid 2017 season) should be a sure thing.
Thousands of elite college athletes are available. Picking number two, the G-Men must end up with an awesome physical specimen of high moral character and an excellent football I.Q.
All-Pro selection and Hall of Fame career is the expectation.
The potential candidates are put through the ringer; physical and mental exams along with interviews and private workouts go on for months. Scouts pour over every play prospects made – or didn’t make – during their college and even high school years.
How could anyone screw up this choice?
According to Harrison Goodman of the New York Post, despite the best of intentions, the results are a coin flip.
“Even with a pick as high as No. 2 in the NFL draft, the past 40 years of selections have shown there’s only a slighter better than 50-50 chance the Giants will land an impact player.”
He cites this sobering data:
Inside the numbers: No. 2 picks since 1978
Hits: 51.3 percent (20 of 39)
Misses: 48.7 percent (19 of 39)
Luck plays a huge rule in the outcome.
This makes me think about financial planning. We create plans that go out decades. Just think of the number of things that can go wrong in this time frame.
This is the financial equivalent of choosing a generational player, like Lawrence Taylor, or the hapless Ryan Leaf as your number two draft choice.
We do our best to gauge the probabilities of success. This includes running Monte Carlo simulations measuring a thousand different market outcomes over time. Projecting reasonable investment returns, along with tax, and inflation rates are part of the process. Finally, we leave a margin of error to account for the unexpected.
Still, nothing is guaranteed.
Financial planning is a compass, not a map. If your advisor thinks your plan is good for the next decade without constant monitoring or adjusting, it’s time for you to find another advisor.
Sadly, most people don’t have the benefit of even a bad plan.
The good news is, unlike NFL teams who wager their future on first-round draft picks, financial planning provides opportunities for do-overs.
Saving, spending, time in the workforce, and return expectations can all be adjusted to get clients back on track. Unfortunately, no one can predict retirement killers like bear markets, health issues, or family problems.
“Man plans and God laughs.”
What’s the answer?
Not creating a plan?
Winston Churchill once said. “Democracy is the worst form of government except for all of the rest.” Insert financial planning for democracy.
Michael Batnick states, “Finance, unfortunately, bears little resemblance to physics or engineering.”
This is the best we can do unless you want to employ a fortune teller.
Good financial planning gives people a much better chance of success than a coin flip.
NFL teams would love these odds Thursday evening.
Source: The Busts and Legends Giants are starting at with No. 2 pick, Harrison Goodman, New York Post, April 22, 2018.