How planning helps us avoid catastrophic errors while maintaining flexibility and margins of safety allow us to thrive even if our plans don’t work out.
In this episode you’ll learn:
- The difference between planning to never fail and planning for small failures.
- Why traditional financial plans have up to 40% chance of failure but we should plan anyway.
- How to play not to lose.
- Why there is joy in the journey.
There are two sides to the “why plan if life is so unpredictable?” debate that David talks about in this episode of Money For the Rest of Us. Some individuals believe you should plan even though countless variables exist, and others insist on not planning for even the slightest event. David has found that in every aspect of life, the only predictable idea is the fact that nothing is 100% predictable. He also believes that there must be a healthy balance between planning for the future and living life day by day. To hear David’s solutions to this age-old dilemma, and to learn how to maintain a healthy level of financial flexibility, be sure to listen to this episode.
Is failure an option? Or are minor mistakes irrelevant as long as the bigger picture is intact?
David discusses two companies in this episode that perfectly illustrate the question “why plan?” NASA is famous for operating under the “failure is not an option” mindset. After the devastating loss of the Challenger Space Shuttle in 1986, redundancy and extra precautions were built into every level of operation. While avoiding catastrophic mistakes is certainly of great importance, NASA’s high level of caution often leads to inflated costs and drawn-out construction timelines. In a recent article published by Financial Times, John Thornhill writes about another aerospace company called Planet. Planet has deployed the world’s largest fleet of private satellites that circle the globe taking photos of Earth’s every inch. These nanosatellites known as CubeSats are not high-resolution cameras and they can cost as little as $20,000 to create. If one (or even a handful) of Planet’s satellites fail, it may be considered a failure but it does not threaten the operation of the entire network. Planet operates within the idea of failure being acceptable, as long as the greater goal is still being accomplished.
Determining the right timing for action is often the most challenging part of financial planning
Once you have decided that small failures are okay for your own financial decisions, you must then determine how to know when to act. When deciding when to sell, buy, or invest you should wait until the time is right, but understand that life happens and things will come up when you least expect them. For example, David explains how he used the tool Portfolio Visualizer to model retirement planning outcomes but the success depends on the assumptions used and the range of potential outcomes is wider than what we are typically comfortable with as individual investors. We are often taught that there is a single right answer to investment questions and not a range of correct answers that occur in actuality. It’s important to remember that there will not always be a clear path or “correct” decisions when planning for your financial future and that you often must simply go with your best guess and avoid catastrophic failures at all costs.
Why there are no mathematical shortcuts for the variables of life and the importance of being flexible when planning for your future
Unfortunately, there is not a tool that allows us to peer into the future to see how decisions will play out. Richard Bookstaber has stated so thoughtfully that “The world cannot be solved, it must only be lived.” There are no concrete answers for financial planning, but one thing is certain—life always comes with a level of unpredictability. Being able to have multiple streams of income and having a healthy level of concern over decisions while still moving forward are all critically important concepts.
Why plan for your financial future? To know how to survive another day
We plan for our futures because it helps us avoid disastrous errors that threaten our ability to survive financially. We play the game of finances while selecting which moves allow us to “lose the slowest” and survive to see another day. We plan to avoid the fundamental mistakes, but we live day by day in order to be flexible.
Episode Chronology[1:42] David introduces the topic for this episode, “Why plan if life is so unpredictable?”
[5:27] The idea of disruptive innovation, and why balance is key when planning your life
[8:38] David explains multiple portfolio simulations while planning for a variety of variables
[13:49] Insights on return model expectations from a recent paper on the Occam’s Razor Redux
[15:53] Getting our timing right can be the biggest part of the challenge
[18:58] Why there are no mathematical shortcuts for the variables of life
[22:18] You have to use flexibility and care when planning for your financial future
[26:01] It’s impossible to live in such a way that you won’t get damaged at all