You have likely heard of Financial Planning, and you may even be using it yourself for retirement planning, building net worth, providing for education, etc. Although it has become a very popular way to design portfolios, I believe that traditional Financial Planning has five specific fatal flaws:

  1. Plans do not adequately provide a margin of safety for black swan events. Plans use averages which work well during normal times but are not geared to deliver a margin of safety for times like the Great Recession of 2007-2009 or the high inflation times of the 1970s.
  • Plans use probability models which are not reflective of actual market probability. Probabilities are calculated using the Monte Carlo Simulation based on the “Normal distribution” (the bell-shaped curve). Stock and bond market annual returns are skewed (weighted) unevenly around the average. Whether using the Normal Distribution or the so-called “Fat-tailed” distributions, neither reflects adequately actual annual returns.
  • Plans are designed with asset allocation which may reduce volatility in the short-term but at the expense of longer-term gains that are necessary to create a margin of safety. As a hypothetical example, let’s use simple math: if stocks average 9% per year, bonds 5%, and cash 1%, and if the asset allocation is 1/3 to each of those asset classes, the average return is 5% (9+5+1=15, 15/3=5). While that may lower the volatility in the short-term, it comes at the expense of longer–term margin of safety.
  • The stock market seldom achieves average estimates. The S&P 500 with dividends reinvested averaged 17% annually from 1979 to 2000 and from March 2009 to December 31, 2019 averaged 16.3%. Consider, too, that the S&P 500 was the same value in 2013 as it was in March 2000. When your feet are on a block of ice and your head is the oven, your average temperature is good. Averages do not work.
  • Plans do not often consider increasing human longevity and the changes in the living expenses that will come with longer lives. Who wants to run out of money at age 100? Where will you find work?

There is a better way. Ask us.