I’m a planner, not a prophet!

Huey_Blackhills_SDMany people believe they should see a financial planner so they can help them do better with their investments. Planning and investing are not the same thing.

“What do you think the market is going to do now?” and “What should I do now?” are the most common questions I get from new people I see. People who have been with me a while know better than ask these, or similar, questions. Here’s why.

My first career was a pilot in the Air Force. I flew helicopters, high performance acrobatic planes, and multi-engine aircraft (to 47 countries on 5 continents). They all had one thing in common – planning – and the longer the flight, the more planning was important.

T38_4_ship_formationWeather – en route, destination and alternate destination. Why an alternate? Because sometimes weather isn’t what you expect when you get there and you can’t land. Mechanical trouble along the way – now what? Emergency procedures! Where do you go when the flight is cut short? Sometime the mission changed, so the destination changed. What does all this sound like? Life!

Financial planning is much like planning a flight. What is your destination (goal)? What if something unexpected happens (emergency procedures)? What are your alternative plans if something goes wrong (insurances: disability before retirement; disability after retirement; home, auto, life)? What if your goal changes – either planned or unplanned? Estate planning is the legal side of a financial plan.

C141B_over_CharlestonOkay … so far I’ve described planning. What about investing? Investing is NOT planning!

There is a lot, repeat, a lot more to financial planning than investing! Investing is the fuel. Yes, you need fuel. But that has very little to do with your plan other than you need something to power the plan. You can’t get anywhere without the fuel … you can’t reach your goals without saving and investing. What’s the fuel for a plan? Invested or saved money. Not enough fuel (money) and you can’t reach your destination. But without a plan there’s no destination (goal) either!

Pilots calculate the fuel they need when flying internationally (or anywhere) to get them to their destination and then to their alternate so they know just how much they need for the entire flight including the emergency plan. But the fuel doesn’t dictate the destination or the plan; the plan dictates the fuel. Most investors get this relationship backwards.

So now it should be clear that fuel (investing) is not the plan, nor is it the destination. Okay all fueled up and no where to go? Without a destination the fuel (money) just gets used up for any little diversion along the way … in other words, wasted or spent without direction. Investors spend a lot of time focusing on the fuel … and miss the purpose of the fuel … to get to their destination as planned. Every time the winds change in the markets many investors get confused. This is because they have no clear destination or plan how to get there.


Why do I say I’m not a prophet? Because doing a calculation is not predicting … often the end result will be quite different from the original calculation’s answer. That means redoing the calculation (and that is quite different from predicting) to match today’s reality with the remaining portion of the journey. Example, rates of returns were expected to be one thing (high) in the late 1990’s after a great tech fueled bubble; not as high in the mid 2000’s after the tech wreck; and even lower today after the housing bubble bust. An illusion of prediction because the prediction always has to change to match the facts. It is not much of a useful prediction if the prediction has to always change before getting to the destination. A review en route helps keep the plan on track once unforeseen events are taken into account after they happen.

Sometimes a calculation may be performed using simple formulas – often called deterministic. This approach is really best for understanding and comparing a concept (such as below in the emergency procedures link for those not yet retired). These types of calculations produce nice smooth curves as you see in that emergency procedure example. But … market returns are anything but smooth.

There’s a couple of methods to adjust for randomness … this lack of smoothness in markets and life.mc results graph

One is a mathematical correction to the randomness (risk) which lowers expectations because of volatility (called geometric return which adjusts for volatility drag)  … yes volatility means your result is actually lower than a non-random simple calculation. Even the interest rates on savings accounts have, and will continue to, change over one’s lifetime.

The other method is called stochastic. Here you get a number of possible outcomes. This is more realistic because here you can see that the results are not always UP … sometimes the end result is DOWN (less than what you started with). Of course, the spread of results are because nothing was changed from the original inputs. So course corrections need to be made … these simulations are re-run periodically too. And that is life too.

wind correctionPlanning is taking the unknown assumptions about tomorrow, when they become facts today, and adjusting the plan with that, now known, new information. In the flying metaphor, this is adjusting for changing winds. Most of the time the nose of the airplane is not pointing right at the destination. You may not like the adjustments you may need to make in life, but that is what needs to be done if events don’t turn out as you planned. You have done that all your life … and will do so the rest of life too.

The calculations are not predictions. They should be used as guides to measure progress along the way and as tools to make decisions. Nobody knows the future. But, that doesn’t mean you can’t get anywhere … you make a plan, and adjust the plan over time based on events that have happened (they are now facts) … that’s called a review!


Emergency Procedures … click below:

Process is important:

What should those not yet retired consider?

What should those already retired consider?

Retirement is a moving target (as is any other goal you have).

About Larry Frank, Sr.

Larry R Frank Sr., MBA, CFP®, is an experienced financial advisor and a published author on Retirement Planning Research. Have a financial question? Click Here to Ask Larry

, , ,

3 Responses to I’m a planner, not a prophet!

  1. Larry Frank, Sr. March 1, 2013 at 7:49 am #

    By the way, unlike the nice picture about adjusting course for the wind above, winds are not constant – they may even change direction as your flight progresses. But, changing winds do not change your destination … you make course corrections along the way to get there.


  1. Why Financial Planning is Important | Better Financial Education Blog - April 3, 2013

    […] has much more to do with managing your behavior towards money and goals than simply investing. Investing is a small subset within the whole of planning. Check out a data visualization blog with source link for the above […]

  2. From planning to investing (Part 1 of 3) | Better Financial Education Blog - June 14, 2013

    […] For a planning vs investing metaphor I’ve used from my prior career as an Air Force pilot, please see this blog. […]

Leave a Reply

Are you human? Click the Banana...