How To Spot An Imaginary Planner


The other day, I was flipping through a trade magazine when an article caught my eye entitled 'Stop Imaginary Planning'.  Always having considered myself a bit of a dissenter in "the business", this was right up my alley.

Many advisers didn't make it through the 2008 market debacle because their value proposition was too closely tied to market returns.  Many who did survive are returning to what financial planning was supposed to be all least for now.

The profession has a history of mass migration away from, and back to, what we might call real planning.  You kinda have to flip-flop when market returns are your go-to argument.

How can you tell the difference?

One red flag for you, as an investor, is giving planning away so they can sell you something.  

Think of the 70s when giving away plans was the hot, new way to sell life insurance.  Trust me.  You can pound a square peg in a round hole!....doesn't mean it fits.

How about the 80s when big money was to be found selling tax shelters. 

There are plenty of other examples but, I think you get the drift. 

So, what is real financial planning?  

Real financial planning is a process that starts with your goals and then charts the best course to get there.  

It is not starting with a solution and then working backward to find a problem that said solution appears to solve.

Do you have a financial plan?  

I'm not talking about a 100-page dusty binder that you've never looked at but paid someone $2 grand to throw together.  There was a time when it was popular to sell those too.  Some guys still do...and they probably also still drive a 1985 BMW, wear penny loafers with no socks, and turn up the collar on their polo shirts.

A real financial plan should be complete but uncomplicated, flexible for changing goals and life events, and easy to update. 

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Grandma's Jars of Money

ImagesUsing separate accounts to manage money is nothing new.  How we separate them determines how effective this approach will be for a given situation.

If all investors were 100% rational, we would view all of our assets (current savings and future earnings) as one lump sum and our liabilities (current obligations and future goals) as another lump sum that is hopefully smaller.  

This would be the most efficient, rational approach.  However, most of us will use some form of "mental accounting" to help us keep goals and assets in context.

Think of your grandparents or great-granparents before we had computers, online banking, and a host of other tools at our disposal.  They used jars of money.  There was a jar for rent, one for groceries, one for the electric bill, a vacation fund maybe, etc...

What makes sense about this approach is that it is goal-based planning...every jar has a purpose.

The mistake many people make is separating accounts based on the source of the funds, usually resulting in more accounts than we need.  Maybe there are a couple different rollover IRAs from previous employers, an inherited IRA, and so on.

Since all of the accounts in the above example are retirement accounts, they have a single purpose.  So, it makes very little sense to keep them separate.  

For the vast majority of us, three accounts is probably the most we would ever need to provide an umbrella for each category of goals.  Any more than this and we start to lose efficiency and focus.

"Things should be made as simple as possible, but not any simpler" ~ Albert Einstein

Inflation: How to Plan For It


...That's right.  I said "Don't plan for inflation."  The chart below shows just how difficult that could be.   Now, I'd like to briefly tell you why it doesn't matter.

If we try to pick a number for inflation and stick with it over time, it's a little like an airline pilot deciding when he takes off from Los Angeles what the weather is going to be like all the way to New York.


When we use a goal-based approach to planning and investing, your goals give us something to focus on and, we're going to price them in today's dollars.  We then review them often just to make sure we are still on track and make minor, almost imperceptible adjustments as needed...just like our airline pilot.

Inflation is only too big a variable if you choose to try to complicate things by including it.

Remember, we're trying to simplify things here.


Your Love of Skydiving and Your Tolerance for Risk

Goals"What is your tolerance for risk?"  This is probably the most worthless question an adviser can ask.  

The answer is both subjective and elusive and is impacted by everything from your attitude toward money to what you had for breakfast and whether you remembered to take your anxiety medication.

Risk tolerance focuses only on your odds of falling short.  Risk should actually be measured in terms of how much you stand to lose. 

How much you can afford to lose and still meet your goals is known as your "risk capacity".  This is a much more objective number and a better gauge of how suitable your plan is.

Goal Setting

Here's just a quick primer on how we set goals in goal-based planning.  You basically write down all of your wants and needs from bare necessities to fantasies and then divide them into categories: "Essential" and "Aspirational".

Essential goals might include a roof over your head while aspirational goals would be a second roof over your head six months out of the year somewhere warm and sunny.

Risk Capacity

So, if you hear that your investment protfolio has a 90 percent chance of getting you to your goal, make sure to turn it around and ask "How much do I stand to lose?"  Let's just say, for example, that the answer is 50 percent.

While you may have a 90 percent chance of buying that vacation house, could you afford to lose 50 percent of your investment without having to sell your primary home and move in with your kids?  This is your risk capacity.

Maybe you'd rather take a plan that only gives you a 75 percent chance of getting to your aspirational goals but an almost airtight lock on your essential goals.

Why? Well, because A) you won't end up homeless, and B) if you start early enough, you can always sock just a little bit more money away and keep your aspirational goals in play too.

Research shows that relatively few people get as far as making a plan, even a very approximate one.

Why Less Can Often Be More

In this video, Barry Schwartz, author of  The Paradox of Choice: Why More Is Less, discusses what he calls the "western dogma" that in order to maximize the welfare of our citizens, we must maximize their freedom, and, of course, the obvious way to maximize freedom is to maximize their choices.  In reverse, More Choices=More Freedom=More Welfare (not the handout kind).

The paradox is that, with this enormous freedom of choice, we are now responsible to make a decision...uh-oh!  Freedom of choice often leads to paralysis instead of liberation.

A study co-authored by Columbia Business School and University of Chicago Booth School of Business showed that for every 10 additional mutual funds offered by a company 401k plan, allocation to equity funds decreased by more than 3%.

The mistake that the financial planning industry makes is that, in addition to choices, they often overload you with a 100-page financial plan that probably includes a few dozen things that you need to address.  You immediately feel overwhelmed (possibly even in the information gathering phase) and give up, pressing on without a plan and hoping for the best because...well, financial planning is just too damn hard!!